The red ocean industry that I decided to cover is video rentals and the company chosen is Netflix. The company has succeeded in overwhelming major competitor Blockbuster through differentiation, in this case the use of the Internet as a distribution mechanism rather than storefronts. According to Kim and Mauborgne (2010), the six paths framework seeks to uncover a new open space for the firm. The six paths are:
"Looking across alternative industries instead of focusing on competing within an industry; looking across strategic groups within industries instead of a company confining itself to established strategic groups; looking across the chain of buyers instead of focusing on the same buyer group as the rest of the industry; looking across complementary products and services instead of a company limiting itself to the scope of an industry's products and services; looking across functional or emotional appeal to buyers instead of accepting an industry's functional or emotional orientation; looking across time instead of focusing on the same point in time as the rest of the industry."
This leads to an understanding that Netflix has a strong customer base for professionally-developed content. It does not need to sell/rent movies anymore than Amazon.com needed to stick with selling books. The customer base for Netflix -- which accounts for a massive portion of total Internet traffic (Svensson, 2011) -- is its main asset and its main product because it can be sold to content providers. This is an important re-framing of the Netflix business, because content providers are in dispute with the company (Dignan, 2011) and because they are simultaneously seeking tight control over Internet distribution mechanisms (McCullagh, 2011).
The three tiers of non-customers are the "soon-to-be" non-customers, of which Netflix has plenty, having alienated a lot of users with fee hikes. The expectation of future fee hikes as the cost of content escalates is going to enlarge this group over the next couple of years. The second tier is "refusing," which could mean anything from technophobes to people disinterested in movies. The third tier is "unexplored," which for Netflix includes people in markets outside of the United States (Kim & Mauborgne, 2010). The first and third tiers are perhaps the most important for Netflix. The company needs to maintain and expand its customer base, rather than watch people leave the company. It also needs to explore globalization of its customer base for a couple of reasons. The first is that it needs higher volumes because its margins are going to be squeezed with higher rights fees. The second is that the more customers Netflix has, the more important it becomes to content providers.
The buyer utility map reveals the major benefit Netflix offers is in Delivery and Disposal. While the company cannot consider its competencies in this area as a form of sustainable competitive advantage, it does outcompete most current content delivery systems in adding value in these areas (compared with television channels, movie theaters, Blockbuster, etc.). The BOS also analyzes the company in terms of four hurdles to execution. These are the cognitive hurdle, the resource hurdle, the motivational hurdle and the political hurdle. Netflix does appear to have a cognitive hurdle in that it maintains a myopic focus on movies and television shows. There is a resource hurdle in that Netflix relies on content providers for things to sell, and it has a strained relationship with many of those partners. There are, however, few motivational hurdles or political hurdles at this point.
This leads to the four actions framework, another element of BOS. To find a new value curve for the company, there are four key actions: reduce, eliminate, raise, and create (Kim & Mauborgne, 2010). One element that Netflix can look at is an expansion of services. The company has never really considered moving beyond its core business. Yet what it really does -- deliver things to consumers over the Internet or in the mail -- is something that can be expanded outward to near infinity. Netflix can sell video games, music, software or anything else that can be transmitted online. It can deliver goods to people's houses not unlike what Amazon or other online retailers do. There is no reason for Netflix to limit what it sells to people, so this is a create strategy, but also an eliminate strategy, eliminating the resource constraint provided by major content providers and eliminating the myopia from which the company suffers with respect to its product/service offering.
Netflix should also raise its service offerings to well above the industry standard. For example, it needs to be able to stream to mobile devices using mobile-specific platforms. It needs to improve customer service to the point where service itself is a point of differentiation. This will also help Netflix charge higher prices in the future, something that appears inevitable given that it will be negotiating new contracts with content providers in the coming years. Netflix also needs to service its suppliers in a manner superior to other content distributors. At present, some content providers are giving preference to other distributors over Netflix, something that hurts Netflix' business. Yet Netflix can do something that other distributors cannot -- it can help the big content providers to have control over their copyrighted works online. That is one of their biggest objectives, so if Netflix helps them with that objective, then both companies will win.
The reduce component of the grid is not something on which Netflix should focus right now. One of the objectives of Blue Ocean is to differentiate while also focusing on cost leadership, so reduction might seem like a valuable component of strategy. For Netflix, however, reduction of anything it does runs counter to the strategy it needs to survive. It cannot reduce its cost structure without compromising its product offerings or its service, both of which need to be increased and improved. It makes no sense to reduce its market and become too focused -- it needs to expand that as well. The other components of the grid provide Netflix with a clear sense of strategic direction that directly addresses the company's current challenges.
The focus element is the service. This should be improved, both to the customers and to the suppliers. The company has survived to this point largely on the strength of its original business idea and its ability to implement that idea. Going beyond, taking Netflix to the next level, will require intense focus on service. Divergence for Netflix is going to be in the product area. The company will stop competing directly with Blockbuster and other operations of that nature, and move into a space with a much broader product range. Netflix is going to take a fresh look at what its major assets are, and realize that its loyal customer base is one of its most important assets that can be leveraged in a number of ways it has not yet thought of. The tagline for Netflix will relate to its ability to stream anything, anywhere. This will not only tell customers what Netflix truly does, but it will also help to overcome the cognitive hurdle that is holding Netflix back.
One of the important elements of BOS is that the strategies that come from the use of its templates should be sustainable. The current "red ocean" version of the Netflix strategy has very little in the way of sustainable competitive advantage. The company's brand and its user base are the closest thing to sustainable, but even those are not since Netflix has not been around very long and the industry in which it is in is highly volatile. The strategy proposed using the BOS tools actually builds sustainability into the Netflix model. This occurs in three key ways. The first is that with a bigger user base, the…