Running Head: FINAL PAPER

Final Paper:
Netflix and Blockbuster: Internal and External Innovators
Herzing College Online
U7A1: MBA 674 - Technology and Innovation
April 17, 2015
Dr. Laura Poluka

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Final Paper:
Netflix and Blockbuster: Internal and External Innovators

After considerable research, two companies involved with the implementation of internal
and external innovation is Netflix and Blockbuster. Netflix took advantage of and adhered to a
policy of internal innovation, while Blockbuster acquired technology through external means.
The following examines the two approaches used by Netflix and Blockbuster from the context of
implementation, evaluation, control, and overall portfolio management.
Implementation
According to White and Bruton (2014), There are two major strategic options that an
organization can take in the development and maintenance of MTI, (1) internal innovation and
(2) obtaining technology through external means (p. xvi). Both approaches of management of
technology innovation (MTI) use processes that involve (a) planning, (b) implementation, and
(c) evaluation and control to ensure that the plans and goals of the firm are met (White &
Bruton, 2014, p. xvi). The questions that organizations ask in implementation include the
following:
1. What should we be doing now, and what can we do later?
2. What are the time and/or specialized skills required for the prioritized activities?
3. What should be delegated and to whom?
(White & Bruton, 2014, p. 122)
Most professionals understand that implementing a strategy or developing a strategic plan
depends on the nature of the organization's leadership, culture of the organization, complexity
of the organization's environment, size of the organization and expertise of planners
(McNamara, n.d., p. 1). The managers at Netflix used the planning process to develop an internal

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innovative strategy, which effectively increased their profitability and created a sustainable
competitive advantage (White & Bruton, 2014). The mission statement for Blockbuster clearly
indicates a strategy involving an external innovative strategy, to grow our core rental business
while continuing to use our brand, our massive database, our stores, and our studio relationships
to deliver an even broader array of home entertainment to both existing and new audience (Xie
& Lin, 2008, p. 97).
Evaluation and Control
Both Netflix and Blockbuster use evaluation and control to assist with determining if the
organization is successful as well as what work needs to be done to maintain or create success,
unfortunately Blockbuster failed to act when opportunity arose (Spector, 2012). The definition of
evaluation is the comparison of actual outcomes with expected outcomes (White & Bruton,
2014, p. 59). The description for control is the adjustments, as needed (White & Bruton, 2014,
p. 59). Evaluation and control are both part of the strategic process, which is circular and they
help to ensure that the achievement of the companys goals and objectives (White & Bruton,
2014).
Evaluation looks at actual outcomes and compares them with what is expected using
qualitative and quantitative metrics for analyzing (White & Bruton, 2014). Control is the process
used to adjust the outcomes to meet the final or desired goals (White & Bruton, 2014). In order
to determine how evaluation and control are the same and how are they different, it helps to
understand the purpose of the two, which is to make sure that the companys goals and
objectives are met after implementing the strategy, or adjustments that may need to be done
(White & Bruton, 2014).
Netflix used evaluation to compare the outcomes of their streaming business and adjusted

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their goals to expand according to the growth of their subscriber base (Netflix, Inc., 2014).
Blockbuster failed to evaluate effectively their external strategy and lacked the controls ability to
adjust the outcomes, removing them as a significant competitor in the Internet television industry
(Thompson, Peteraf, Gamble, & Strickland lll, 2014).
Blockbuster, once a movie rental powerhouse with over $4.5 billion in annual rental
revenues and more than 9,000 company-owned and franchised stores in a host of
countries, was a shadow of its former self in 2012. After losing over $4 billion during the
20022010 periods, closing thousands of store locations, and launching several
unsuccessful strategic attempts to rejuvenate revenues and return to profitability,
Blockbuster filed for Chapter 11 bankruptcy protection in September 2010. (Thompson et
al., 2014, pp. C-135)
Because of Blockbusters financial difficulties, lack of leadership and poor decision-making, they
mostly relied on obtaining technology through external means and performed little internal
innovation (Thompson et al., 2014).
Overall Portfolio Management
Whether and organization uses internal innovation, or relies on external technology
acquisition, White and Bruton (2014) states, Effective innovation portfolio management
typically involves balancing new initiatives with the completion of ongoing projects and using
the knowledge of one project to help complete others (White & Bruton, 2014, p. 193). White and
Bruton (2014) also states:
However, sometimes the firm does not want to build new products around the same
technology but instead it wants to diversify its efforts. This diversification requires a
portfolio management approach as a part of the portfolio strategy because of the

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increased complexity in technology and organizational administration. (White & Bruton,

2014, p. 299)
The characteristics involved with the portfolio management of technology and innovation
include the following:
1. It is dynamic with uncertain information and changing conditions.
2. It is ongoing and must be constantly updated.
3. It requires evaluation, selection, and prioritization.
4. It demands that bad product and process technologies be eliminated.
5. It should be designed to review the total portfolio on a regular basis.
(White & Bruton, 2014, p. 299)
The processes involved with managing the complexity of technology management in a portfolio
include the following:
1. Identification of opportunities and threats in the external environment and the
internal strengths and weaknesses of the firm.
2. Selection of technologies that the firm wants to develop and exploit. The firm
needs to examine the potential outcomes for each technology area to determine
the feasibility of success and development of competitive advantage.
3. Acquisition of new knowledge through the development of internal innovation or
the obtaining of external technologies.
4. Exploitation of opportunities through the development of strong products and
processes. Exploitation can also include the development of unrelated platforms
in various business segments.
5. Protection is the last area to consider. Product and process ownership is an

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important issue. Once a firm decides to add a product or process technology to its
portfolio, it must develop ways to protect the market share that is gained.
Sometimes the best protection is an aggressive strategy of market penetration or
platform leadership. Sometimes the decision is how to keep from being
leapfrogged or beaten in the marketplace.
(White & Bruton, 2014, pp. 299-300)
The decisions made by Netflix and Blockbuster relied on portfolio issues and processes
regarding internal and external knowledge development (White & Bruton, 2014). Each
organization viewed change, uncertainty, and risk differently, but portfolio management gave
Netflix and Blockbuster the means to identify key elements and spread risk in an ordered,
systematic manner (White & Bruton, 2014, p. 300). Achieving a higher economic return and an
increase in firm performance are a couple reasons that organizations rely on external technology
acquisition; the positive impact of external technology acquisition on firm performance
increases with the level of internal R&D efforts (Tsai & Wang, 2008, p. 91).
Netflix Strategy
The determination of Netflix to pursue an internal innovation strategy involved three
common areas, the product, processes, and the market (White & Bruton, 2014). The increase in
streaming subscribers results from the wide variety of mobile devices capable of streaming
movies and television shows (Businessweek, 2014). The 2013 annual report describes a
harmonious internal environment with a total of 2,327 employees and benefits that include a
401k plan and an employee stock purchase program (ESPP) (Netflix, Inc., 2014).
The core strategy for Netflix is to continue to grow streaming subscriptions both
domestically and internationally while improving customer satisfaction, expanding content, and

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enhancing the user interface and extending streaming service to even more mobile device
(Netflix, Inc., 2015). This strategy is a major part of the success of Netflix and influenced the
industry as a whole by the example they set for overcoming adversity and properly managing
technology (Netflix, Inc., 2014).
Netflix Recommendations
The primary technology Netflix uses that propelled them to the top of the Internet
television business is their streaming and database technology (Netflix, Inc., 2014). After
researching macroeconomic variables and the competitive environment, Netflix should stay the
course and stay up to date with technological advances, as well as understand all laws,
regulations consumer rights, and privacy issues surrounding the Internet (Winston & Edelbach,
2012). By managing technology and innovation, Netflix continues to evolve, and keep their
competitive advantage because of their offensive internal innovative strategies mixed with
external technological alliances (Netflix, Inc., 2015).
The company has an active position for further growth, and provided they maintain their
internal innovation strategy and their efforts to collaborate with cable companies, television
networks, and electronic manufacturers, the investment risks are minimal. Because of the stock
performance in 2013 and recent stock activity, Netflix proved they have the potential to be a
great long-term investment (Netflix, Inc., 2014). Netflix should continue to take an offensive role
with their internal innovation strategy, implemented by their proven and committed leaders by
Recognizing and rewarding success, inspiring, and modeling behaviorsresulting in true
commitment than use of authority (Ott, KZatz, & Thomas, 2015, p. 1).
Blockbuster Recommendations
Blockbusters efforts to obtain new technology externally, has them looking at related

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and unrelated products, related and unrelated processes, and related and unrelated markets in
building a portfolio (White & Bruton, 2014, p. 302). Blockbuster must overcome the different
levels of complexity associated with their alliances, mergers, and acquisitions by focusing on
internal strategies (Xie & Lin, 2008). In order to fulfill their vision statement to be a complete
source for movies and games (Xie & Lin, 2008, p. 97), Blockbuster must learn to use evaluation
and control to adjust their goals and processes and required by the principles of managing
technology and innovation (Rainer & Cegielski, 2011).
This company must increase their use of technology in order to start to be a player in the
Internet television and streaming business (Bushey, 2014). Blockbuster must change their
strategy to include some offense and not just defensive in nature, focusing on current
technologies (Xie & Lin, 2008). Blockbuster should have purchased Netflix when they had the
chance, so the recommendation is for them to keep their eyes open for opportunities to increase
their strategic position within the industry (Bushey, 2014). The focus on their current strategies
are revenue sharing agreement, subscription rental program, development of Blockbuster
Online(TM), elimination of late fees, game pass and game rush, and reducing employees in order
to reduce operating costs (Xie & Lin, 2008, p. 69), but they remain behind as a competitor in
the market.
Blockbuster, once a movie rental powerhouse with over $4.5 billion in annual rental
revenues and more than 9,000 company-owned and franchised stores in a host of
countries, was a shadow of its former self in 2012. After losing over $4 billion during the
20022010 periods, closing thousands of store locations, and launching several
unsuccessful strategic attempts to rejuvenate revenues and return to profitability,
Blockbuster filed for Chapter 11 bankruptcy protection in September 2010. (Thompson et

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al., 2014, pp. C-135)

Blockbusters must make improvements to overcome their financial difficulties, lack of
leadership, and poor decision-making (Thompson et al., 2014).
Conclusion
As a final note regarding the two approaches used by Netflix and Blockbuster from the
context of implementation, evaluation, control, and overall portfolio management, Netflix made
better use of managing technology and innovation. Blockbuster failed in their efforts gain a
competitive by playing it safe and focusing solely on obtaining technology through external
means. Netflix succeeded where Blockbuster failed by understanding the processes involved
with implementation, evaluation, control, and overall portfolio management.

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References

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Businessweek. (2014). Netflix, Inc.: Private Company Information. Retrieved November 13,
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McNamara, C. (n.d.). All About Strategic Planning: Free Management Library. Retrieved April
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