CHANGE INITIATIVE ASSESSMENT: NETFLIX 1
Change Initiative Assessment: Netflix
James Rod
School of Business, Liberty University
Respectfully submitted to Dr. Tony Perry
March 8, 2024
CHANGE INITIATIVE ASSESSMENT: NETFLIX 2
Abstract
This paper aims to analyze the change initiatives of Netflix, one of the world's leading
entertainment service providers. Starting as a DVD rental service in 1997, Netflix has undergone
multiple change initiatives to become a global streaming service with over 231 million
subscribers across 190 countries. This paper provides an overview of Netflix's early beginnings,
new opportunities, and its subscription and data analytics approach. The analysis of these change
initiatives will provide insights into how Netflix has managed to maintain its global business
growth while consistently delivering captivating content to delight its existing subscribers and
entice new ones.
Keywords: Netflix, change initiatives, ambidexterity, agile framework, disruptive
innovation, market-shaping
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Change Initiative Assessment: Netflix
Change is inevitable in any organization, and its success depends on how well it is
managed. In this paper, we will analyze the change initiative undertaken by Netflix, one of the
world's leading entertainment service providers. Netflix started as a DVD rental service and
evolved into a global streaming giant with over 231 million subscribers across 190 countries. We
will examine the key drivers and challenges of the change initiative and evaluate the company's
strategies for achieving its goals. Through this analysis, we aim to provide insights into how
organizations can navigate change successfully and sustainably.
Part 1: Case Description
Overview of Netflix Inc.
Netflix is one of the world’s leading entertainment service providers, offering television
shows, movies, documentaries, and other entertainment programs through online streaming on
various devices (Netflix Inc., 2021). Netflix streams to more than 231 million subscribers in over
30 languages across 190 countries (Netflix Inc., 2023). Netflix members have many subscription
plans and programming options to choose from. The company even creates its own award-
winning content. Netflix’s primary strategy is global business growth while maintaining its
operating margin (Netflix Inc., 2021). The company aims to enhance member satisfaction by
consistently delivering captivating content that delights existing subscribers and entices new
ones. Additionally, Netflix actively seeks to cultivate conversation around its content to amplify
members' joy and continually refine its user interface, making it easier for members to find
enjoyable content (Netflix Inc., 2021).
Early Beginnings
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Netflix did not start as a streaming service. Throughout the years, it has undergone
multiple change initiatives. Initially founded in 1997 by Marc Randolph and Reed Hastings,
Netflix started by renting and selling DVDs over the Internet and mailing them to customers
through the U.S. postal service (Netflix Inc., 2021). The DVD format was still new to the
industry but allowed Randolph and Hastings to leverage its compact size. The initial strategy was
to buy over 1,000 copies of newly released movies, which customers could reserve before they
were available in stores. Renting DVDs at a brick-and-mortar storefront was it or miss. Netflix
guaranteed they would have titles in stock and could quickly deliver them to customers. Netflix
was the first company to rent DVDs by mail (Netflix Inc., 2021).
In April 1998, Netflix officially opened for business with 30 employees and 925 titles for
rent. The rental program then allowed customers to keep the DVDs for seven days with the
option to extend for an additional cost or even purchase the rented disc (Netflix Inc., 2021). The
company’s website provided customers with movie reviews and automatic suggestions once they
rented several titles. Netflix’s first promotional scheme was partnered with Warner Brothers and
the release of the film L.A. Confidential (Netflix Inc., 2021). The customer response to the
promotion was so strong that it briefly forced Netflix to shut down its website for 48 hours. A
few months after the company had officially opened for business, Toshiba America, Pioneer,
Hewlett-Packard, Apple, and Sony announced similar promotional ventures with Netflix.
New Opportunities
In December 1998, Netflix announced it would stop selling DVDs and direct customers
to Amazon.com, Inc. for purchases (Netflix Inc., 2021). In return, Netflix secured promotional
opportunities on Amazon’s website. The decision was based on several factors, including modest
sales figures, intense competition, and substantial efforts required to maintain competitiveness.
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At that point, Netflix’s library had grown to 2,300 titles, while home DVD player sales were on
the rise, prices remained high, and only one percent of U.S. households owned such a device
(Netflix Inc., 2021).
In July 1999, the CEO of Netflix, Reed Hastings, revealed the company had obtained $30
million in financing from Group Arnault, a French luxury goods investment firm venturing into
e-commerce (Netflix Inc., 2021). The increase of capital was earmarked for brand-building and
marketing efforts. The backing from Group Arnault became pivotal in establishing Netflix’s
dominance in the DVD rental category as new competitors emerged. The company was now
purchasing 10,000 or more copies of popular titles, had an inventory of over 250,000 discs, and
had 110 employees (Netflix Inc., 2021).
Subscription and Data Analytics Approach
In September 1999, Netflix introduced a subscription plan that allowed members to rent
DVDs for $15.95 per month with no late fees or due dates. The Marquee Program was possible
because the company had reached the required economy of scale of 10,000 orders being
processed daily by its proprietary software system (Netflix Inc., 2021). Netflix was rapidly
growing in popularity but still reported losses for the fiscal year 1999 as substantial finances
went into marketing. The following year, Netflix launched a new service that compared rental
patterns among its customers and looked for similarities (Netflix Inc., 2021). The CineMatch
program would recommend titles to people with similar profiles and could combine the attributes
of two users. The information gathered from CineMatch was shared with movie studios to help
them with marketing campaigns. By mid-2000, Netflix had distributed over 100,000 DVDs per
week through its updated Marquee Program, which offered customers unlimited rentals for
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$19.95 per month. By the end of the year, Netflix had over 7,000 titles and over 250,000
customers (Netflix Inc., 2021).
Between late 2000 and throughout 2001, Netflix began establishing strategic revenue-
sharing agreements with popular film studios such as Warner Home Video, Columbia Tri-Star,
DreamWorks SKG, and Artisan Entertainment Inc. (Netflix Inc., 2021). These agreements
provided the film studios with a percentage of rental revenues, and Netflix received better
pricing on large quantities of DVDs. Netflix was able to capitalize on its ability to acquire movie
titles that were not offered in mainstream video stores such as Blockbuster Inc. (Netflix Inc.,
2021). For example, Netflix offered approximately 1,000 Bollywood films from India. These
films circulated frequently among subscribers, which allowed the CineMatch system to lead
viewers to discover and rent lesser-known films, allowing customers to explore unfamiliar titles
without paying for each movie individually (Netflix Inc., 2021). Netflix secured other venture
capital funds and predicted profitability by the fourth quarter of the fiscal year. Netflix’s monthly
subscription rate doubled following the September 11th terrorist attacks against the United
States. The increase in subscriptions was due to lower costs to purchase DVD players and people
being afraid to go out (Netflix Inc., 2021). Netflix still incurred a loss of $21.1 million for the
year on revenues of $74.3 million despite its expanding customer base.
Initial Public Offering
Netflix had finally reached its goal of 500,000 subscriptions in February 2002. The
following month, the company announced it would go public with an initial public offering
(IPO) (Netflix Inc., 2021). The company sold 5.5 million shares, raising $82.5 million, which
was used to lower debt and pay promotional expenses. To meet the subscription rate and
customer orders, Netflix opened new regional distribution facilities across the United States. In
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total, the company purchased ten facilities and spent about $60,000 per site for equipment that
could handle up to 50,000 orders per day (Netflix Inc., 2021). None of the sites maintained a
complete inventory of DVDs. Consequently, when an order for an out-of-stock disc was
received, the company’s computer system identified the nearest available copy and automatically
generated a shipping order. By the end of 2002, Netflix had 670,000 subscribers, over 11,500
different titles, and revenue-sharing agreements with over 50 film distributors (Netflix Inc.,
2021).
Over time, competition began to rise. Blockbuster offered its customers an unlimited, no-
late-fee subscription service for DVD rentals in its stores and purchased an online DVD rental
company. Walmart began an unlimited online DVD rental service and undercut Netflix’s
subscription by a dollar. In response, Netflix created a strategy to open twelve more distribution
facilities by the end of 2003, reach 5 million subscribers by 2009, and begin distribution in
Canada (Netflix Inc., 2021). Netflix reached one million subscribers in February 2003 and
opened five additional shipping facilities. The company’s stock prices had risen almost 50
percent since the IPO. By December 2003, Netflix had 1.5 million subscribers, posted a profit of
$2.3 million for the quarter, and saw its stock value increase 400 percent over the past year
(Netflix Inc., 2021).
Introduction to Streaming and Original Content
With the rapid emergence of streaming video technology in 2004, Netflix began to take
notice. In September 2004, Netflix partnered with TiVo Inc. to create a way of streaming secure
video content to personal computers through the Internet (Netflix Inc., 2021). The ability to
stream video content became the company’s long-term growth strategy. By January 2007, Netflix
was able to make streaming a reality with limited titles available for online viewing. The
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streaming option was a highly disruptive change that completely revolutionized the concept of
watching movies and television shows online (Abbas, 2022). Consumers welcomed this major
change because everyone was using smartphones, laptops, and computers, and the trend of going
to the cinema to watch a movie was declining. In 2008, the company partnered with LG
Electronics Inc. to create a device to stream videos directly to a television. The success with LG
Electronics Inc. opened the way for similar agreements with Roku, Microsoft, Sony, Nintendo,
and Apple. By the end of 2010, Netflix had over 20 million subscribers, with more than half
using the streaming service (Netflix Inc., 2021).
Amazon Instant Video became a prominent competition for Netflix; however, the
company changed again by introducing its first original series, which was a huge success
(Netflix Inc., 2021). Over the years, Netflix has produced several award-winning series and
continues to surprise major film studios and television networks with their original content. The
success of Netflix has caused other companies to establish their own streaming services. As
Netflix continues to be the world’s largest online streaming entertainment service, it must remain
an innovative and agile company.
Part 2: Analysis of the Change Initiative
Diagnosis of Current Situation
As a streaming service giant, Netflix has undergone significant transformations over the
years. It initially started as a DVD-by-mail service and became a global streaming platform,
creating its own content (Netflix Inc., 2021). Leadership within the organization recognized
pivotal moments to take advantage of, such as the introduction of streaming in 2007 and the
subsequent shift in how people consume television shows and movies. The business model
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evolved from the introduction of subscription-based DVD rentals without late fees to aligning its
streaming service with changing consumer behavior and ultimately producing exclusive content.
Unique Advantages and Effective Leadership
There are five identifiable distinctions that make Netflix more appealing than rival
streaming services (de Zilwa, 2023). First, Netflix offers an extensive range of genres, making it
an appealing choice for families with varying tastes; whether catering to adults or children of
different ages, there is something for everyone. Second, Netflix consistently delivers high-quality
content, evidenced by its impressive collection of 44 Emmy awards and 7 Academy awards in
2021. Third, Netflix operates in 190 countries, providing content in multiple languages,
reflecting a rich tapestry of cultural values and interests. Fourth, Netflix produces television
shows and movies from various countries, capturing local norms and stories. This global
approach resonates with audiences worldwide. Finally, Netflix leverages a sophisticated
algorithm to tailor recommendations based on user preferences. This algorithm enhances
customer engagement, satisfaction, and retention (de Zilwa, 2023). The combination of diverse
content, award-winning quality, global presence, cultural exploration, and personalized
recommendations creates an unmatched streaming experience.
During the COVID pandemic, Netflix experienced a rapid and substantial increase in
subscription membership, with 182 million subscribers in 2020 and 222 million subscribers in
2021 (de Zilwa, 2023). Profits and stock prices rose increasingly. During the first six months of
2022, Netflix experienced a significant decline in subscriber numbers, share price, and
capitalization. However, Netflix was able to recover between July 2022 and July 2023. The
company had been on a rollercoaster and survived. This remarkable recovery can be attributed to
its leadership’s proactive approach. They confronted challenges head-on, recognizing the need
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for drastic changes. Wilmot Hastings, the CEO at the time, exemplified this ability. Despite his
historical aversion to advertisements on Netflix, he reversed his stance when the company’s
performance deteriorated (de Zilwa, 2023). Similarly, Netflix’s leadership ignored password
sharing, but once they realized that up to 100 million people accessed Netflix using shared
credentials, they took action to address this revenue loss. Initiatives were developed to address
unauthorized access (de Zilwa, 2023). Notably, the decision to reduce prices in markets with low
penetration and to abandon basic subscription plans in Canada, the USA, and the UK highlights
the leadership’s willingness to reverse or alter previous decisions when necessary. Less effective
leaders who exhibit excessive pride or self-confidence may have dismissed warning signs of the
downturn and believe their past successes make them immune to failure, leading them to ignore
adaptation. Some leaders may have succumbed to inertia or clung to path dependency, resisting
new approaches and remaining committed to existing strategies (de Zilwa, 2023). Influential
leaders, such as the leadership of Netflix, embrace change, learn from setbacks, and adapt their
strategies to navigate challenges successfully.
Ambidexterity
A fundamental challenge for companies is handling current operations while preparing
for the future. Strategy researchers have identified this challenge as ambidexterity. Ambidexterity
is a balancing act of managing exploitation and exploration (Jaworski, 2021). Exploitation is
improving your current product or service, while exploration is testing new ideas or entering new
markets. Research has shown that ambidexterity is associated with increased business
performance (Jaworski, 2021). Within the context of ambidexterity, there are two competing
thoughts: structural and contextual (Mier et al., 2021). Structural ambidexterity involves separate
structures within an organization, with one focusing on exploration and the other focusing on
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exploitation. Contextual ambidexterity focuses on how people behave and interact within a
single structure that integrates exploitation and exploration. Employees collectively learn to think
and act ambidextrously. Social processes such as shared values, communication, and unwritten
routines support the contextual ambidexterity mindset (Mier et al., 2021).
Netflix assumes a contextual ambidexterity approach. For example, the company
identified two emerging technologies, the Internet and DVDs, merged early DVD owners with its
website, and delivered DVDs via the U.S. Postal Service (Mier et al., 2021). Netflix exploited
current and existing products and services and explored new ideas, creating a new market.
Netflix's leadership understood the importance of finding the right product-market fit for
widespread commercialization while focusing on the future (Mier et al., 2021).
Ambidexterity is the expressed capability of an organization to manage the tension
generated by the contradictory demands of exploration and exploitation (Maclean et al., 2021).
Some researchers identified ambidexterity as having a progressive structure with four themes:
contextualizing, mutualizing, dramatizing, and focalizing. Contextualizing involves maintaining
an innovative focus on exploration and exploitation. Mutualizing consists of breaking down
boundaries between exploration and innovation. Dramatizing involves harnessing the exploration
and exploitation innovation into competitive conflict. Finally, focalizing involves ranking
exploration and exploitation into a value hierarchy (Maclean et al., 2021).
Agile Framework
An agile framework like Netflix is intentionally created to adapt to change. The
framework includes structures, systems, and procedures that can flexibly respond to changing
conditions without requiring formal change management interventions (Heinz, 2021). The
organization's culture and way of doing things are characterized by focusing on change as a
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critical feature. To create an agile framework, leaders must take responsibility for delivering their
company's strategy as guiding principles, not strict rules (Souza & Romero, 2021). By taking on
this approach, leaders can create an environment where employees feel empowered to make
quick decisions that lead to strategic agility. For example, Netflix delivers enjoyable customer
experiences using adaptive algorithms, which start with team thinking and development. The
streaming company invested significantly more than its competitors in developing its
recommendation system. They created a highly powerful data mining system beyond relying on
a customer's past consumption to create recommendations. Instead, it also considers cross-
reference usage patterns across all users to offer unique recommendations (Souza & Romero,
2021).
An agile framework promotes a mindset of certain principles such as transparency,
inspection, and adaptation. It emphasizes values such as courage, focus, openness, commitment,
and respect. By promoting cross-functional and self-organizing teams, leadership plays the role
of a servant leader, leading by example. The innovation lies in treating employees as human
beings rather than resources, always involving them in decisions and breaking down
departmentalization and hierarchical structures (Souza & Romero, 2021). Agile teams and their
leaders must focus on the interplay of empowerment, which can be affected by the customer and
the organizational environment (Grass et al., 2020). The relationship between agile teams and
their leaders is dynamic and dependent on the customer and the organizational environment. The
customer and organizational environment influence the dynamics of empowerment between agile
teams and leaders (Grass et al., 2020).
Disruptive Innovation and Market-Shaping
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New processes and services are introduced by disruptive innovations, such as electric
cars and social networking websites. Disruptive innovations do not necessarily create chaos and
upheaval; they often challenge traditional ways of thinking and acting and outdated business
models. Managing truly disruptive innovations may be more challenging due to their riskiness
and the lack of established routines for handling them (Heinz, 2021).
Market-shaping is a strategic approach that involves a conscious effort by a company to
modify the market by changing the content of the exchange, reconfiguring stakeholders'
involvement, and reforming the institutions that govern their behaviors (Nenonen et al., 2019).
The aim is to create new opportunities to connect the resources of different stakeholders in
innovative ways, ultimately enhancing value creation in the market. To achieve this goal, market-
shaping firms explore the potential value of connecting intra- and inter-stakeholder resources in
new ways, initiate changes in various market characteristics to enable the formation of new
resource linkages, and mobilize relevant stakeholders to unlock existing resources for new
purposes (Nenonen et al., 2019).
Netflix has been renowned for its disruptive innovation and market-shaping strategies.
The company's disruptive innovation was showcased when it leveraged existing products and
services, such as the Internet and DVDs, and introduced new ideas, such as DVD-by-mail, that
revolutionized the movie rental market (Netflix Inc., 2021). Netflix's DVD-by-mail service
allowed consumers to rent movies online and receive them by mail, thereby eliminating the need
for physical stores and late fees. Another example of Netflix's market-shaping strategy is its use
of algorithm recommendations. The company's recommendation system analyzes users' viewing
history, preferences, and rating suggestions to personalize content and provide a more engaging
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viewing experience (Netflix Inc., 2021). This technology aims to improve outcomes such as
availability and access to high-quality content by targeting consumers' preferences and interests.
Furthermore, Netflix's algorithm recommendations have allowed the company to gather
valuable data on users' viewing habits and preferences, which it has used to create original
content tailored to their tastes (Netflix Inc., 2021). This approach has helped Netflix become a
leading player in producing original content. Overall, Netflix's disruptive innovation and market-
shaping strategies have transformed the traditional media industry and how we consume
entertainment (Nenonen et al., 2019).
Recommendations
High performance is achieved through expressing individual needs and values for
innovative and exciting work, having visionary leadership, and implementing the right systems
and processes, especially technology and tools, to accomplish work (Coruzzi, 2020). Netflix is a
giant in the entertainment and streaming industry. As an agile and ambidextrous organization, the
company is well-established and will continue to be successful. Room for improvement would
include taking advantage of digitalization. Digitalization has revolutionized the business world
with its ability to create new market opportunities and innovative business models (Burchardt &
Maisch, 2019). From e-commerce to cloud computing, these advancements have opened new
avenues for exponential growth, allowing businesses to reach wider audiences and streamline
their operations. As technology continues to evolve, digitalization is set to play an increasingly
vital role in shaping the future of commerce.
Another recommendation is to integrate the Scrum methodology within Netflix's agile
framework. Scrum is an all-encompassing method for fostering flexible, self-governing, and
responsive collaboration that embodies six key attributes: inherent uncertainty, autonomous
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project teams, concurrent development stages, cross-functional education, unobtrusive
governance, and institutional knowledge sharing (Hidalgo, 2019). The Scrum methodology
involves breaking work into small tasks, tracking progress in regular meetings, and re-planning
to develop products incrementally.
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