Strategy Alternatives Available for the Netflix Company - Case Study Example

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Global Strategy-Individual Report Contents Contents 2 Introduction 4 Part I External Analysis 5 1 Macro-Environmental Analysis 5 2 Industry Analysis 6 Porter’s 5 Forces of Competition 6 1.3 Opportunities and Threats (Partial SWOT analysis) 7 Part II – Internal analysis 8 2.1 Analysis of NETFLIX resources and competencies 8 Value Chain Analysis 8 Threshold resources and competencies 9 VRIO 9 2.2 Strengths and Weaknesses (Partial SWOT analysis) 9 Part III – NETFLIX Issues and challenges 10 Part IV – The identification of NETFLIX’s business strategy and its strategic options for growth 11 4.1 NETFLIX generic strategies 11 4.2 Strategic options 11 4.3 Which are the resources needed to implement the strategy chosen? 11 Part 5 Conclusion 12 References 13 Appendix 1: 14 Appendix 2: 15 Appendix 3: Ansoff Matrix 16 Appendix 4: Porter’s Generic Strategies 17 Appendix 5: VRIO 18 Appendix 6: BCG Matrix 20 Introduction The purpose of this report is to look at the various strategy alternatives that are available for the company Netflix in order to survive in the long run in the media and entertainment industry. Netflix is a popular on demand media which is based in California. The company serves most of the developed nations like the United States, Canada, UK, Ireland, Denmark, Netherlands and a few other European nations. The DVD of this company is sent to the public via mail. The company had been operating in the international market since 1997 and the services are mostly subscription based. The company provides digital distribution service to its viewers. The company has a subscriber base of 26 million world-wide and generates revenue of $1.5 billion. The main theme of the mission of Netflix is to be the best brand in the distribution of media and entertainment The values of the company include the following essential characteristics Intelligence Communication Reliability Judgment Creativity Honesty Passion Productivity Selflessness Part I External Analysis In order to analyse the various strategies taken by the company; it is important to incorporate the various tools that would help in the macroeconomic as well as macroeconomic scanning for the company. 1.1 Macro-Environmental Analysis First of all a PESTEL analysis has been conducted which would provide an idea about the macroeconomic environment of the company. Political: The markets in which the company operates are mostly capitalist free market economy. As a result there is not much governmental intervention in the ways in which the company conducts its business (Barney and Hesterly, 2011, pp. 75-82). There is no barrier to the company in form of government regulation and hence there is no requirement for the company to get into any tie ups with the government for fulfilling the bureaucratic needs. Economic The economic aspect which Netflix faces is slowing down. With the Eurozone crisis and current economic slowdown, the business will face stagnation in their subscription base as compared to other years. Social Since the social aspect of different countries is different hence Netflix has to align their marketing strategy accordingly as per the countries in which they operate. Technological: The introduction of various new technologies in the global market has given rise to a demand among the consumers for a better experience of movie viewing. The opportunities for the consumers have widening as a result of this. Environmental The environmental forces which Netflix faces are constantly changing. They have to face new competitor and hence has to change their marketing strategy accordingly. Legal Each country has own legal aspect of video streaming. This facility is not available in all countries and also there are restrictions on the contents of the Online Streaming which they have to abide by. 1.2 Industry Analysis Porter’s 5 Forces of Competition According to Michael Porter there are 5 competitive forces that drive the competition in a particular industry. The model can be represented in a better way with the help of the diagram in Appendix 1. Industry Competitors The major players in this particular market are Blockbuster, Concast, Wal-Mart, Apple, Time Warner, Best Buy, Amazon, RedBox, AT&T as well as Echostar. Thus it can be seen that the market is basically a monopolistically competitive market each of which produces a differentiated product. Most of these brands cater to al the market segments of the US media and the entertainment segment of the industry. The competitive forces are quite high in this industry thought Netflix has decent amount of the market share (Peng, 2012, p. 71). Each of the segments like the on-demand segment, online segment as well as the television segment is dominated by different brands. Potential entrants Since media and entertainment industry is an emerging industry there might be a lot of scope for the potential entrants to enter the markets. The new brands may offer a lot of low cost packages which may lure the consumers (Ferrell, 2012, p.477). However the initial cost of setting up of the service is quite a large amount. Thus these new brands may not be able to incur such huge cost at the first instance. Threat of substitutes Possibility of substitute products taking up the market share is not quite likely. This is mainly because the fact that the older age groups which constitute the major part of the target market of Netflix would remain loyal to the brand and would continue availing of the services of Netflix without switching over to the other forms of media (Elgohary, 2011, p. 121). Buyers The bargaining power of the buyer is neutral in this case. There are a large number of players in the industry. However, the switching cost for the buyers would be quite high because of the installation cost of a new set of services. Thus the price sensitive buyers may be hesitant to switch (Thompson, 2012, pp. 44-56). Suppliers The bargaining power of the suppliers would also be less dominant in the industry. This is because the suppliers of the films of the older brands have smaller sizes of their operations (Pride and Ferrell, 2011, p. 358). Though the industry is dependent on the studios the bargaining power of the latter is less because of the large number of the suppliers. 1.3 Opportunities and Threats (Partial SWOT analysis) Opportunities Netflix has the biggest opportunities in the international segment; hence it invested in Europe which increased their subscription base. Again Netflix started to operate in the Latin America region which has a huge potential of increasing its subscription base. The internet penetration across the world has increased, which has helped the company in increasing its user base. With advancement of smart phones and Smart TVs it makes accessing Netflix all the more easier. Since it has a huge collection of content, it is able to delight the consumers and at the same time bring newer ones. Threats The market of Internet streaming space is increasing with newer entrants in the market like Redox Instant of Coinstar’s which have priced its services at the same price. It also faces tough competition from Amazon, HBO, and Hulu etc. which also offers decent streaming. With rise of the content prices, it is becoming difficult for Netflix to maintain its low cost structure. Part II – Internal analysis The internal analysis would provide an idea about the internal business environment specific to the company. 2.1 Analysis of NETFLIX resources and competencies Value Chain Analysis The chain of processes through which the value of the product of the company is created till it reaches the end customer can be understood with the help of the value chain analysis of Michael Porter as shown in the Appendix 2: Figure 2. Thus the function where the value is mainly created is the supply chain and the logistics part where the distribution of the movies takes place. Threshold resources and competencies The set of competencies for Netflix would be the orientation towards achieving efficiency in the distribution process. Since the company is operating all over the world the management of the group processes is also another area of competency of Netflix. On the other hand the threshold competency would be the specialized knowledge about the operations of the media and entertainment distribution as well as the company’s ability to assess its own strengths and weaknesses. The various sections of the company where it has competency has been shown in the BCG matrix in Appendix 6. VRIO The VRIO framework is an internal analysis of Netflix. This model basically asks four questions to check the competitive potential of the company. See Appendix 5. The large scale of operations which has helped the company to retain an international presence would be the competitive advantage for the company. 2.2 Strengths and Weaknesses (Partial SWOT analysis) Strengths of Netflix Netflix has taken advantage of being the first mover in thereby securing the highest market size in the Internet TV market. Netflix has a global subscription base of around 33.3 million. Hence it beats comfortably its nearest rival Hulu Plus which has around 3 million customers using their streaming channel. Netflix has a high brand value on account of the strong media attention it received from the launch of the House of Cards series. Netflix has a very good value proposition to its customers (Hill, 2012, p. C250). It offers a large content collection with a comparatively low fixed price with unlimited viewing options. Its competitive advantage is its low cost business model, which make the customers more likely to choose the “over-the-top” subscription over regular cable connection. Weakness The revenue model of Netflix is highly fluctuating. They have made major expansion in the international market through debt funding which makes the credit risk of the company high. The DVD segment of Netflix is also declining, as more consumers are now choosing to view their favourite shows on Internet. It cost Netflix a loss of around 3.0 million subscription base. Since Netflix works on a low revenue model, it can’t increase its price much although it faces threat from new entrants like Verizon and Coinstar. Financial Performance of Netflix The financial performance of Netflix has improved drastically over the last few years of its operation especially after the inception of the new millennium. The revenue of the company has increased almost 100 times from $35.9 million to $ 3205.6 million. Since the company is a listed company it is seen that the EPS of the company has also increased from 2.8 to 52.8 which is a very sound performance from the point of view of the investors. Though, as on 2000 the company reported a negative profit, the net income of Netflix increased to $226.1. The company also experienced an increase in the net operating income which means that the company could achieve economies of scale within a span of 5 years. The company has a current ratio of 1.49 which is close to what the industry reports. This proves that the management of cash in the organisation in carried out in an efficient manner. Part III – NETFLIX Issues and challenges From the above analysis that is provided in the previous sections, the challenges and the issues that the company faces can be listed below. The company had announced that the DVD and streaming services would be separated without taking a proper feedback from the customers. The increase in the prices had hurt the customers. The company had to maintain a balance between the two separate SBUs which have been formed after the separation. The promotion of the transition that would be taking place among the US subscribers from mail delivery to streaming delivery. Aiming for an international expansion. Part IV – The identification of NETFLIX’s business strategy and its strategic options for growth 4.1 NETFLIX generic strategies The generic strategies of Michael porter have been presented in Appendix 4. These strategies help the company to identify which are the areas where the business can be nurtured which would help the business to grow in the long run. 4.2 Strategic options The Ansoff Matrix provides a 360 degree analysis of Netflix’s strategic options that are available at different circumstances. It is provided in the Appendix 3. 4.3 Which are the resources needed to implement the strategy chosen? The company needs to have mainly the financial resources as well as the intangible resources like the brand equity to implement the feasible strategies successfully. The cost structure has to be made in such a way that the customers can be offered the product at much low prices. Part 5 Conclusion Netflix has multi-pronged strategy to increase the consumer base. It is giving their consumer options of selecting form multiple DVD titles. Netflix is able to identify TV shows and movies which are in high demand and as a result it is put up in queue for streaming or sent through mail. The company has spent heavily on their brand promotion to increase the consumer base (Deimler, Lesser, Rhodes and Sinha, 2013, p. 25). They have also been expanding their networks across Europe and other countries. They have tied up with many companies like Disney to help them acquire new content. Clearly Netflix must go for new Content acquisition to include shows like “Just for Kids section”. By doing this they can target specific customers. They also must give the consumers option of selecting from arranges of popular movie collection of their choice. If they can increase the number of titles in their library it will help them maintain competitive position in the market (Kazmi, 2008, p. 126). References Barney, J. and Hesterly, W., 2011. Strategic Management and Competitive Advantage: Concepts and Cases. New York: Pearson Customs Publishers. Deimler, M.S., Lesser, R., Rhodes, D. and Sinha, J. 2013. Own the Future: 50 Ways to Win from The Boston Consulting Group. New Jersey: John Wiley & Sons. Elgohary, W.R. 2011. Netflix: Striving for Customer Satisfaction. New York: CreateSpace. Ferrell, O.C. 2012. Marketing Strategy Text and Cases. Mason: Cengage Learning. Hill, C.W.L. 2012. Strategic Management Cases: An Integrated Approach. Mason: Cengage Learning. Kazmi, A. 2008. Strategic Management and Business Policy. New Delhi: Tata McGraw-Hill Education. Peng, M.W. 2012. Global Strategy. Mason: Cengage Learning. Porter, M., 2008.Competitive Strategy: Techniques for Analyzing Industries and Competitors. Berlin: Simon and Schuster. Pride, W.M. and Ferrell, O. C. 2011. Marketing. Mason: Cengage Learning. Thompson, A., 2012. Essentials of Strategic Management: The Quest for Competitive Advantage. New Jersey: McGraw Hill Education. Appendix 1: Figure 1: Five forces Porter, 2008, p. 64 Appendix 2: Figure 2: Porter's Value Chain Analysis Appendix 3: Ansoff Matrix Existing Products New Products Netflix don’t need any diversification strategy since they must concentrate on the present strategy to improve on it. Appendix 4: Porter’s Generic Strategies Overall Cost Leadership Absence of any stores of Netflix so less maintenance Very little fixed cost so can achieve economies of scale easily Differentiation Unique technology of the Netflix High speed of delivery Focus Large number of distribution centers The suggested films are provided to the customers for viewing Preferences of the local customers are considered Appendix 5: VRIO Elements How Valuable is it. How rare is it. How difficult is it to imitate How good is the firm organized DVD Rental DVD rental business is valuable to the customers. This DVD rental industry is not rare. This industry is not difficult to imitate. The firm is relatively organised as compared to its competitors. Physical Distribution It has huge presence of network across most of Europe and US. As compared to its competitors it has huge physical distribution presence. Yes it is difficult to imitate Netflix’s distribution strategy. It will require a substantial funding Their physical distribution part is sustainable to the business. Blu Ray Rental This service is valuable to the customers. It is not rare to have a Blu Ray Rental service. Again is it not difficult to imitate this business by other competitors. Netflix has a temporary competitive position in this segment and they need to Online Streaming Yes it is valuable to the consumers and to the company Yes, this Online Streaming is rare. Yes, Online Streaming is difficult to imitate as it requires a heavy investment upfront and access to appropriate technologies. Netflix has a maintained a sustainable position in its Online Streaming business. Appendix 6: BCG Matrix BCG MATRIX MARKET SHARE HIGH LOW Online Streaming Movie Downloads Subscriber base Netflix has developed software which makes commercials during the streaming of a video stop. The cash cow for Netflix is Generating demand for the cheap and older films Netflix has currently no business in the Dog position Read More