Porter’s Competitive Strategy: Netflix Case Study

“Lean” packages of cable TV or other streaming services? Follow the segmentation of the increasing multimillionaire television market.

Prof. Ricardo Britto
Doctor in Business Administration at USP
Dean of the IBS Americas

At first it was just TV and it was present in almost 1.4 billion households on the planet in 2017. In 1972, HBO was created, and it was the first channel with exclusive content for subscribers. In 1997, Netflix was created in the USA (Van Der Werff, 2019). It had a huge success as the service offered affordable prices, movies and shows via streaming. The content was produced by Netflix itself or by big studios that were hired. The latter ones, however, realized how profitable the industry was and entered the market as well. These tendencies are slow, but they constantly reduce the number of cable TV subscribers. Moreover, there is also the increase of streaming services because of such companies as Disney, CBS, HBO, Amazon and others that mainly offer their own movies and shows (Heritage, 2019). Given that, the consumer, who already appears to be a cable TV subscriber, will pay a lot to access those services.

Many people wondered: “How can I watch my favorite shows?” The marketing professionals make another question instead: considering the segmentation of the increasing television market, what would be the strategy for a company to be established in the market and grow? 

This is what we are trying to answer. 

Michael Porter’s Competitive Strategy (1979) can be helpful in order to answer some of these questions. He offers an analysis framework that could help companies improve their position in the market and increase competitiveness as well as financial results in general. 

Among the concepts Porter offers, there is one that deserves special attention:  five competitive forces in a particular industry:  

  1. The Threat of New Entrants: new competitors can change the market share of existing companies. Apart from this, new firms can affect the access to resources for the firms that have already been long established in the industry.  
  2. Intensifying Industry Rivalry: competition tends to increase as new firms might appear or the industry in which existing companies operate is relatively limited.  
  3. Threat of Substitutes: when the prices of substitute products created by competitors remain low, the industry becomes less profitable.  
  4. Bargaining Power of Buyers: the more powerful the buyer groups, the less profitable the industry will be. 
  5. The Bargaining Power of Suppliers: by threatening to raise prices or reduce the quality of goods or services, suppliers can greatly reduce the profitability of an industry. 

Porter’s Five Forces Framework (Source: Harvard Business Review, 1979) 

Other key concepts of the author include choosing a strategy and stick to it:  

• A cost reduction strategy, in which a firm achieves dominance over its competitors and gains greater returns thanks to a policy of a reduced production and sales costs without affecting quality. 

• A product differentiation strategy. A firm creates a unique product or a service within the industry changing design, brand image or incrementing new technologies, which reinforces the sense of exclusivity and brand loyalty and, consequently, generates higher profits. 

• A focus strategy, targeting a specific buyer group, product line segment or a geographic market. 

In many cases, in order to implement the chosen strategy, a firm must also develop more than one of the strategies mentioned above. 


Porter, M. E. Competitive StrategyTechniques for Analyzing Industries and Competitors(Source: New York Free Press, 1980). 

Nevertheless, it is hard to predict a competitor’s future steps and perform appropriate competitive actions. One of the solutions is to determine relative profitability of a firm by subdividing industry into strategic groups. To undertake an industry analysis, a company must list all firms in the industry in “strategic groups,” and then assess each group according to the five competitive forces. Secondly, it is necessary to predict the industry’s evolution. To anticipate the necessary strategic adjustments, a firm must consider the likelihood that the industry will be affected by evolutionary processes such as new entrants, innovations, and changes in consumer segments (Porter, 1980).  

As it was expected, the Competitive Strategy received both praise and criticism. It can be observed that the use of typologies, such as Porter’s, reduces the wide range of combinations that a manager would have to consider. Some authors oppose Porter’s view that firms that achieve cost leadership should encourage competitors to do so as well. In addition, as multiple companies seek cost leadership (or a low-cost approach), the market gradually becomes more homogeneous. Thus, the cost leader would benefit as there would be less room for differentiation. 

It is important to note that Porter’s thinking has evolved since the publishing of the Competitive Strategy. In this work, he emphasizes the importance of the industry as a whole – that is, the external environment – in choosing the company’s strategy. Already in 1985’s, in the book called “Competitive Advantage” (1985), he seeks to describe how a company can gain a sustainable cost advantage or differentiate itself from its competitors. Here Porter pays more attention to internal dynamics, based on the exploration of unique content or distinct execution mode, which will enable the company to achieve a more advantageous position in the market.  

In any case, the knowledge of Porter’s strategies – as well as the criticisms and adjustments to his works is essential for managers to be able to improve their performance. The next step will be examining strategies efficiently developed in different segments of audiovisual industry and verifying if the Competitive Strategy analysis helps understand them better. 

One can note that in a shrinking cable TV market scenario and given the expansion of streaming movie and series providers, each of the main companies in these segments sought to follow a differentiated strategy. 

Among cable TV companies, some continued with “fat packages” containing dozens of channels. Others are betting on “lean packages” that offer fewer channels at an affordable price. This is what Sling TV has been doing: the company was launched in the US in 2015 and gives access to a small number of cable TV channels and a large streaming network (Jason, 2018). Sling TV can fit into at least two of Michael Porter’s five competitive forces: a “new entrant” that launched “substitute products” priced lower than those of competitors. 

Among streaming services, Netflix, which in 2018 became the world’s most market valued entertainment company estimated at $ 153 billion, has several competitive advantages listed by Porter. Netflix remains loyal to its relatively low-cost policy offering thousands of movies and series produced by itself or by many other companies. In order to do this, it applies three competitive strategies mentioned in the book. First, it strives to reduce its production and sales costs maintaining high quality. Secondly, it differentiates its products by offering some unique features within the industry in the form of technological advances. Third, while prioritizing the US and European markets, it also tries to attract specific consumer segments on the periphery of the audiovisual media world.  

It is clear that following its strategy, Netflix tried to kill two birds with one stone, or even better, three birds, while focusing on differentiation, cost leadership and niche markets. Despite having achieved unprecedented market success, the company risks losing its leadership position due to the dispersed focus. 

Indeed, it remains unclear whether Netflix will be able to maintain its policy offering high quality diversified products at low prices. Many movie producers refuse to renew their contracts with other companies to allow them to show their popular series, but even if they do, they charge high prices for that. This is the case of the NBC series “The Office”, which from 2021 will be shown only by NBC Universal streaming platform. Netflix paid Warner no less than $ 100 million to continue showing “Friends” for a year, but after that the show should move to Warner Media’s streaming service which is being created (Van Der Werff, 2019). 

Considering this policy, producers use the fifth competitive force: the bargaining power of suppliers. By threatening to raise prices – or withdraw the goods they produce – they get more money from the buyer. 

In fact, a number of the competitive forces mentioned by Porter manifest themselves in the increasingly fierce competition between Netflix and other streaming audiovisual media providers. New entrants threaten market share and often offer cheaper substitute products. Not surprisingly, there is also the growing “rivalry between competitors, resulting from different factors such as the presence of numerous competitors of equivalent strength”. 

One of these competitors is Disney, a giant of Netflix’s size. Stuart Heritage notes in the article  “Streaming TV is about to become very expensive – here’s why” (2019) Disney “will launch Disney +, a streaming platform that … will block a huge amount of content: Disney movies, ABC shows, Marvel and Pixar movies, Lucas movies, The Simpsons and everything else produced by 20th Century Fox”. 

Taking this scenario into account, it does not seem easy, according to Porter (1980), to “predict a competitor’s future moves”. Profits may decline, which will require managers in the industry to have theoretical knowledge, analytical skills, and good decision-making abilities. Moreover, the consumer will definitely suffer the rise in the price.  

The analysis conducted above allows us to identify the decay of two existing dominant structures. The first is a cable TV, with its “fat” packages. In the article “Media Companies Are Launching Streaming Services to Survive – Here’s How They Can Thrive” (2018), Daniel Jackson reports that in the US, the number of cable TV households has dropped from 103 million in 2012 to 92 million in 2017. 

While the rise in the number of these providers seems to be an irreversible trend, other factors indicate the blurring of the boundaries between the segments of audiovisual media. This is the case of Sling TV, a successful blend of cable TV (with “lean” packages) and a streaming network. This fusion may be one of the paths for the future of the media industry, and managers and future managers need to look closely at it. 

The impact of new technologies on traditional competitive models can be clearly observed in this particular market as well as in many others. While Michael Porter’s vision used to help managers understand their competitive landscape in the 1980s and 1990s, nowadays companies can build their strategies in a much more complex way. This approach opens new perspectives for managers, creating additional opportunities for growth. At the same time, it brings challenges, especially for those companies that are having hard time adapting to new technologies. The current challenge for managers is to drive the digital transformation in their firms as well as being able to reinvent their strategic options. Organizations that failed to cope with this dual mission tend to face growing difficulties in remaining profitable in the coming years. It is also important that the society and the government follow industries’ structural transformations. In the midst of the great transformations that are taking place in countless markets, some key sectors can end up being consolidated to the point of becoming monopolies, which leads to reduced competition and the loss of incentives for innovation commonly brought by healthy competition between companies. In a media communication sector, a monopoly would also bring the additional risk of losing the desirable diversity of ideas and points of view. This is something very relevant for democratic societies.


  References

Heritage, S. (2019). Streaming TV is about to get very expensive – here is why. The Guardian. Retrieved from: https://www.theguardian.com/tv-and-radio/2019/jun/27/streaming-tv-is-about-to-get-very-expensive-heres-why 

Jason, D. (2018). Media companies are launching streaming services to survive – here is how they can thrive. Business Insider. Retrieved from: https://www.businessinsider.com/media-companies-are-launching-streaming-services-to-combat-cord-cutting-2018-5 

Porter, M. E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York Free Press.  

Porter, M.E. (1979). How Competitive Forces Shape Strategy. Harvard Business Review, Vol. 57, No. 2, pp. 137-145. 

Porter, M. E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. The Free Press. New York.  

Van Der Werff, E. (2019). The future of streaming is the cable bundle. Vox. Retrieved from: https://www.vox.com/culture/2019/3/15/18225269/streaming-future-cable-netflix-hulu-disney 

Innovation Management: Embraer Case Study

“Most companies die not because they do the wrong things, but because they keep doing the right things too long.” Yves Doz.

Prof. Ricardo Britto
Doctor in Business Administration at USP
Dean of the IBS Americas

George Eastman invented photographic film, the portable camera and the industry of amateur photography. Founded in 1889, with the slogan “you press the button, we do the rest”, Eastman Kodak would dominate this industry for a century. By the end of the 1970s, the company controlled 90% of the American market for films (and 85% of the market for cameras) and had 100,000 employees all over the world (Tendayi, Toma & Gons, 2017). In 1989, the engineer Steven Sasson submitted to the board of Kodak the prototype of a digital camera (Films were the main business for the company, so the project was shelved by Kodak. When they realized their mistake, it was too late. The business of films virtually disappeared within a few years. The attempts to enter the new market of digital photography were not successful, and Kodak filed for bankruptcy in 2012. In the early 1990s, the company Embraer, founded in 1969 by the Brazilian government to produce airplanes like the “Bandeirante”, was facing some difficulties that led it to the brink of collapse. Ozires Silva, the president of Embraer since its foundation up until 1986, came back to lead its privatization, completed in 1994. In 2018, Embraer was the fourth aircraft manufacturer in the world (with revenues of US$ 5,07 billions), preceded by Boeing, Airbus and Bombardier (Saconi, 2019). How does it happen that some companies are successful… and some collapse? The main reason is most likely, among others, a matter of innovation.

There are several “types” of innovation. Clayton M. Christensen, from Harvard Business School, a world reference in innovation for large companies, introduces in his book “The Innovator’s Dilemma” (1997), two key concepts: Disruptive Innovation and the Innovator’s Dilemma. A disruptive innovation completely overturns a given market. Disruptive technologies initially create products that are worse in terms of performance, but at the same time offer other value attributes. These new attributes attract new customers and create new markets, but established companies rarely notice these opportunities. In other words, very well managed companies collapse by losing opportunities to innovate and create new products or markets.

The same qualities that make a company successful also put it at risk. The standards of success and failure of the companies that face disruptive technological changes come from good managerial decisions – this is the “Innovator’s Dilemma”. For example, the managers at Kodak acted to protect their business, but failed to perceive the signs of change until it was too late.

The thing is that corporations need consistent and growing profits, and disruptive technologies initially offer just small profits that are not attractive. When disruptive technologies seem attractive, it is too late. More responsive competitors have already conquered the market and the big first mover advantages.

Generally, managers assume that disruptive technologies are not a threat because these products will not have a performance comparable to that of existing products, and they do not wish to spend their time or energy on projects that seem small and that will not bring any real benefit to the company and/or for their careers. Besides, a failed idea will probably jeopardize their promotion; therefore, they will rarely be willing to invest in learning and would rather focus on conventional technologies. Finally, disruptive technologies create new markets with a size that was impossible to evaluate in advance. There is no way to foresee and plan: it will always be wrong (Christensen, 1997). Besides that, it is normal that disruptive technologies fail initially, but end up being used in the markets. When it comes to disruptive technologies, managers should experiment and learn. It is vital that a company creates opportunities for that purpose. The question is how.

Tendayi Viki, a co-writer of “The Corporate Startup: How established companies can develop successful innovation ecosystems” (2017) highlights that most companies were startups at some point. As they become successful, they start protecting their main businesses and distance themselves from the mentality that encourages innovation. Bureaucracy and traditional management practices tend to strangle “out-of-the-box” thinking and the capacity of the company to notice new trends. Furthermore, the fear of not meeting the expectations of the market and affecting the price of shares, as well as the lack of methodologies to manage innovation teams and processes, make it difficult for large companies to successfully innovate

In order to overcome these issues, big corporations have to be more flexible and apply an ecosystem approach to their operations. Thus, a firm can comprise a balanced mix of stable cash cows and, at the same time, develop its new products that can include disruptive ones for lower-end or emerging markets. The goal is to have various business models with the balanced portfolio of mature and established operations and early stage products aimed at future sales. Usually this strategy is also financially attractive as the money generated from cash cows invariably goes to R&D expenses (Tendayi, Toma & Gons, 2017).

Viki raises the fundamental question: why do innovation programs succeed… or fail? Failure seems to result from two scenarios: the first one, corporations try to manage innovation with conventional approaches: business plans, ROI analysis, etc. (these simply do not apply to innovation) or (on the opposite side) they reserve “creative spaces” for innovators to work with whatever they want, with no managerial process at all. In both cases, what we have is an “innovation theater” – where time and resources are consumed, generally with no result.

On the other side, success seems to depend on the capacity of implementing managerial tools adequate to well-established business models versus those who still are in research mode. This is what is called an ambidextrous organization: excellent in both research and execution.

The history of Embraer begins in 1968, with the inaugural flight of the prototype for the first Brazilian airplane, project IPD6504, led by the aeronautical engineer and then FAB major, Ozires Silva. Embraer was created the following year, with the mission of mass-production of Embraer EMB-110. Ozires Silva was the first president of the company, a position he held until 1986. In his conferences, he used to narrate a comment he heard about that prototype: “Did it have to be that ugly?!” (Carnevalli, 2019).

In 1991, Ozires returned to Embraer to lead its privatization, completed in 1994. The company went through a long process of restructuration, becoming one of the largest manufacturers of commercial jets in the world.

Nowadays, Embraer is one of the most innovative companies in the world. Its E190-E2 Program was awarded in the category Project of the Year 2019 by the Project Management Institute. According to Fernando Antonio Oliveira, director of the E2 Program: “Embraer created a legacy by daring the impossible, starting with the dream of producing airplanes in a country that did not even manufacture bicycles. 50 years later, the E2 teams proved that it was possible to dream big and develop a new high-technology commercial jet, even surpassing the highest expectations…” (Carnevalli, 2019).

Embraer sought innovation through partnerships. According to André Gasparotti, Technological Development Director, the “secret” is to collaborate with other companies, universities and startups. Embraer has, among others, a partnership with Uber for the development of urban and autonomous flying cars; and with Saab, within the framework of the program for the construction and codevelopment of Gripen fighters in Brazil. “Partnerships are already essential, but in the future, they will be even more. In the past, innovative organizations talked a lot about industrial secrecy. Today, industrial secrecy is still important, but companies act in ecosystems of innovation” (Kastner, 2018).

Regarding innovation, Embraer acts in two fronts that correspond to the concepts of adjacent innovations and transformational innovations. The former consists in identifying key players for the development of products for niches – more current/ foreseeable needs – that may result in products within the usual deadlines in the company. As for the latter, Embraer X acts as the radical innovation branch of the company. It has to do with thinking of new solutions, completely different, for a future that is difficult to foresee. “Development takes a very long time in the aircraft sector”, he affirms. “To innovate, you need to foresee the trends and create a robust technology that can be updated over time” (Carnevalli, 2019). It is important to mention that Embraer X was not included in the selling of 80% of the commercial area of the company to Boeing, and its creations remain independent.

The “flying car” is an example of the kind of projects developed by Embraer X – in this case, through a partnership with Uber. This is an “aircraft for the masses”, according to Antonio Campello, president of the unit. Since this vehicle will be electric and will use a rechargeable battery, operating costs are expected to be lower to those of a common helicopter. The aircraft’s design should be simple, with fixed parts and cheap maintenance, easily accessible and with the least possible noise, since the idea is that it flies closer to the ground than helicopter (Embraer Revela Carro, 2019).

Still, according to Campello, a large part of the project is being developed in Brazil. Embraer has not revealed a date for introducing the aircraft. As published by “O Estado de São Paulo” in June 2019, it is unknown whether the Brazilian company will participate in the first tests planned by Uber for 2020 in the cities of Melbourne, in Australia, Dallas and Los Angeles, in the USA.

In its Flight Plan 2030, according to the Embraer website, an air traffic management concept for urban air mobility, Embraer X establishes a vision of the future that drives the project of electric powered vertical takeoff and landing (eVTOLs) vehicles and of urban air mobility (UAM), which is based upon three main pillars:

  • A new generation of electric vehicles with vertical takeoff and landing will change our experience of urban mobility. Innovators are designing and testing a new generation of aircrafts that will serve as transportation in the cities of the 21st century;
  • For the initial launching, many eVTOLs will have an on-board pilot. After some time, however, those aircrafts will advance to a phase of autonomous operation;
  • The next decade will be vital for the growth and acceptance of the UAM industry. It is in that period that the standards of safety, protection and performance will be defined.

This case of innovation management of Embraer shows the concepts of ambidextrous organization (excellent in both research and execution); of the construction of an ecosystem of innovation that is balanced between current/ foreseeable products (core), adjacent and disruptive – with a company that dedicates exclusively to the latter, Embraer X. In conclusion, it is worth mentioning the “business plan” of the eVTOL project. This document establishes a clear and inspiring vision of the future; highlights the possible difficulties and obstacles; and does not venture into financial forecasts of any kind.

Even though the main goal of this article is to reflect on the matter of innovation from the point of view of business strategies, it is important to highlight an aspect that was seemingly forgotten: the ethical issue. An organization does not exist “to create profit”. Profit is supposed to be a “natural” outcome of the organization fulfilling its role in society. Therefore, here goes an alert against innovations which potential for profit is not linked to effective improvements for society, but to manipulative use of knowledge. It is particularly important being alert with developments with the potential to interfere in privacy, freedom and citizenship; and/or lead to undesirable impacts to the society and to the environment.

Innovating is necessary. Any company that loses its capacity to create, foresee or – at least – keep track of the pace of evolution in the sector and markets where it acts will be doomed to disappear. In this article, we have analyzed the issue of innovation within large companies, we have seen how and why they may fail, always making good (and old?) managerial decisions… for too long.

A corporation that has many resources, but is tangled in a web of decisions that supposedly guarantees the continuity and sustainable growth of the business, can also lead to financial failure (the “innovator’s dilemma”) and needs to become ambidextrous: developing the ability to research the environment and to identify new opportunities. The main recommendation seems to be avoiding the trap of the “innovation theater” in its two forms: the illusion of control represented by “business plans” (that never work); and the incentives to “creativity”, confused with innovation. Moreover, the development of a true ecosystem of innovation is an enormous challenge that must be faced.

Finally, we must keep in mind the ethical issues of sustainability. Business’ business is business – but the (legitimate) pursuit of profit cannot do without the fundamental mission of seeking the maximum common good. The purpose of the effort for innovation must be improving the lives of people – whereas profit is just a consequence of that.


Referencies

Christensen, C.M. (1997). The Innovator’s Dilemma When New Technologies Cause Great Firms to Fail. Harvard Business Press. Retrieved from: https://epdf.pub/the-innovators-dilemma-when-new-technologies-cause-great-firms-to-fail-managemen.html  

Tendayi, V., Toma, D., Gons, E. (2017, April). The Corporate Startup: How established companies can develop successful innovation ecosystems. Vakmedianet. Retrieved from:  https://www.startse.com/noticia/nova-economia/corporate/34647/kodak-como-ela-foi-de-uma-das-empresas-mais-inovadoras-ate-falencia 

Saconi, A. (2019). Embraer é única brasileira entre 100 maiores empresas do setor aeroespacial. UOL. Retrieved from: https://economia.uol.com.br/noticias/redacao/2019/09/07/embraer-ranking-empresas-setor-aeroespacial.htm?cmpid=copiaecola 

Kastner, T. (2018). Acordo faz Embraer perder quase R$ 3 bilhões na Bolsa. Folha. Retrieved from: https://www1.folha.uol.com.br/mercado/2018/07/acoes-da-embraer-caem-mais-de-14-apos-anuncio-de-acordo-com-boeing.shtml\

Carnevalli, E. (2019). O dilema da Embraer: tentar prever o futuro ou criá-lo? Época Negócios. Retrieved from: https://epocanegocios.globo.com/Empresa/noticia/2019/09/o-dilema-da-embraer-tentar-prever-o-futuro-ou-cria-lo.html 

Embraer revela carro voador ‘para as massas’. (2019). Estadão. Retrieved from: https://epocanegocios.globo.com/Tecnologia/noticia/2019/06/epoca-negocios-embraer-revela-carro-voador-para-as-massas.html 

Embraer. (n.d.). Retrieved from: https://embraerx.embraer.com/global/en/flightplan-2030