Netflix Strategic Appraisal - Case Study Example

Netflix strategic appraisal Table of Contents Introduction and company background 4 External analysis 5 Threat of new entry: High 5 Effect of supplier power: High 5 Effect of rivalry: High 5 Buyer power: Low 6 Effect of substitutes: Moderate 6 Internal analysis 7 Value chain 7 Supplier chain management 7 Operations 7 Distributor 7 Marketing 8 Core competencies 8 Tangible 8 Intangible 8 Key success factors 9 Issues and challenges 9 Strategic analysis 11 Generation of strategic growth options 11 Evaluation of strategic growth options 12 Description of selected strategy 13 Conclusion 13 Reference List 15 Introduction and company background Strategy formulation is a detailed process which involves applying rationality so that suitable plans can be formulated for synchronizing the needs of the organization with the environment (Teece, 2010). Every firm is therefore required to indulge in strategy formulation so that it becomes possible to determine the future courses of action; identify risks and distribute resources efficiently. Strategic appraisal refers to the process of studying the strategic policies of an organization so as to be able to understand their functioning protocols and how effectively resources are managed. Strategic appraisal is also conducted in order to understand whether the functioning policies of a firm are synchronized with its objectives and long term aims. Strategic appraisal involves studying the internal and external environment (Teece, 2010). It also involves analysing the different strategic techniques and policies followed by an organization. The current paper involves conducting the strategic appraisal for Netflix. Netflix is a company which provides rental videos, movies and streaming services on demand. The services are provided in the nations of South America, North America (other than Cuba) and in some of the nations of Europe (Dess, Lumpkin and Eisner, 2006). Subscribers are required to select the video or from the available options on the Netflix website and accordingly make payment. Once the payments have been made, the movie or the video is sent as DVD to them through mail. Netflix also provides them the option of watching movies or video through online streaming. Apart from movies and videos, the website also provides television series. Netflix functions in the home entertainment sector. Since its development in the year 1997 in California, Netflix has emerged onto becoming one of the pioneers of rental DVD services. Netflix’s organizational strategy has remained to provide unlimited streaming services to a viewing device through the internet. The company also utilizes a mail order system to deliver physical DVD’s to consumers. The onset of the digital era has facilitated the growth of Netflix. The company continues to maintain its focus upon providing innovative services and remain the leader of the rental movie sector. In the current paper, the strategic policies of Netflix have been analysed and discussed. The strategic appraisal has been done by firstly studying the internal and external environment of Netflix. Secondly the different issues and challenges faced by the organization have been identified. Then finally the strategic policies adopted by the firm to remain competitive and continue providing efficient services have been discussed upon (Dess, Lumpkin and Eisner, 2006). External analysis External analysis has been carried out by incorporating the Porters five force framework. . Threat of new entry: High The efficiency of the operations of firms operating in the rental home entertainment sector is based upon how well they develop a distribution channel leading to an enhanced market share. As the distribution channels enhance, the company is able to achieve economies of scale and thereby attract greater number of consumers through reduced prices. The costs of capital are also not very high as compared to other industries. Primary investments are required to be made in procuring sever, electronic devices and distribution channels. Apart from the investments made in technology and computer systems, other expenses are comparatively low. This attracts a number of new firms into the industry of rental home entertainment. Additionally, the significant growth experienced by firms operating in this sector acts as an important point of attraction for new firms. Firms entering into the segment are however required to make huge investments in developing a distribution network and strategic relations with suppliers (Teece, 2010). Effect of supplier power: High Supplier power is predominantly strong in this sector. The suppliers of the rental movie industry are companies such as Sony Pictures, Buena Vista, 20th Century Fox, Warner Brothers, Universal and Paramount Pictures (Teece, 2010). These are big movie production houses who spend hugely for producing movies. Netflix procures movie distribution rights from such companies and provides the same to its subscribers. Since movie production houses incur large sums of money for making movies, they accordingly charge high sums from distributors. Accordingly firms like Netflix are required to charge highly from subscribers of its services. However as firms expand in size and reputation, they are likely to be able to reduce the supplier power over them and charge lower prices (Teece, 2010). Effect of rivalry: High Rivalry in the entertainment industry is adequately high. There are a number of rental movie service providers in the industry. Rivalry occurs on the parameters of prices charged, technology and features provided. Redbox and Block Buster are the prime rivals of Netflix in the markets in which the firm operates. Amazon can also be considered as a potential rival considering the number of movies they offer as rental purchase. Each of the firms operating in this sector develops their own distribution networks and ensures that their suppliers and subscribers are not lost. However the man point of rivalry amongst firms is in relation to technological superiority (Abraham, 2013). Buyer power: Low In case of movies and videos whose pirated versions cannot be found online, it becomes essential for the viewers to purchase the same. Moreover buyers have over the years adapted themselves with the use of DVD and watching online movies. When pirated versions of their favourite movies are not available, viewers are compelled to watch movies through purchasing the same through such online rental movie providers. Buyers have no power or the option to bargain with the providers of such online services (Allen, Feils and Disbrow, 2013). However, Netflix has been successful in achieving superior market position as it offers its services at comparatively lower prices than its competitors. Effect of substitutes: Moderate Movie lovers, who prefer watching movies as soon as they release are less likely to switch to other option when it comes to watching movies whose pirated versions are not available. Surveys conducted by Mintel reveal that an increasing number of viewers commit towards online entertainment options (Allen, Feils and Disbrow, 2013). It is also seen that a considerably large number of individuals rely more on electronic sources for recreation rather than non-electronic sources such as reading books. As a result, firms such as Netflix who provide entertainment options online have experienced significant growth in last couple of years. However, consumers who belong to the category of convenient viewers are likely to wait patiently till pirated versions of movies are released. A potential alternative for movies provided by firms such as Netflix is the video game industry. A large number of young male costumers of the online entertainment industry are dedicated to playing video game. Increasing sales in the video game industry is a potential threat for companies such as Netflix (Abraham, 2013). Internal analysis Value chain Supplier chain management One of Netflix’s biggest advantages is its well managed supplier distribution channels. The company has about 50 movie distributors. The company has signed long term contracts with majority of such distribution houses from whom it receives movies. Suppliers play a highly essential role in the strategic development of the company. Netflix manages its relation with suppliers by procuring services and making payments on time (Hitt, Ireland and Hoskisson, 2012). Operations In the online movie retailing industry, services are delivered instantaneously. Movies are provided to the consumers on the release date itself. Moreover, by availing different types of subscriptions, consumers can avail the opportunities of watching their favourite movies repeatedly (Jeon, Park and Digman, 2008). The instant and fast delivery of services is one of the biggest advantages of Netflix. Additionally, the company in order to attract more consumers provides discounts and free subscriptions over a particular amount of payments made. Although the online streaming services provided by the company are significantly high, the company’s postal delivery system of DVD’s is seen to slowly lose its popularity. This is due to the fact that in order to provide consumers with the rental movie, much dependency gets created upon the postal systems which are not as swift and timely as compared to online streaming options (Jeon, Park and Digman, 2008). Distributor Netflix is popular for its timely delivery of services. The distributor channel of the company is based on efficient logistics systems. The online streaming system is hassle free and comparatively faster than most of the other online rental movie service providers. Also, the technology used by Netflix is highly advanced and innovative. Online movie watchers are seen to praise the advanced systems of the company (Jeon, Park and Digman, 2008). Marketing Netflix attracts consumers by offering a number of different subscription options and discounts or re subscriptions. Although the services offered by the company are online, marketing strategies are adopted based on both online and offline mediums. In online promotions, the company posts its advertisements on different websites and sends promotional mails to existing and potential customers. Netflix is also seen to indulge in television, newspaper and magazine advertisements. One of Netflix’s most popular marketing strategies is the allowance given to new subscribers for not paying the fee for the first month. The free first month offer is mainly provided as a trial service. Consumers, especially who are movie addicts greatly take advantage of such offers. Since the services offered by the company are fast and superior quality, consumers are likely to make repeated purchases and become long term subscribers of Netflix (Hitt, Ireland and Hoskisson, 2012). Core competencies Tangible The financial position of Netflix has remained satisfactorily stable since its inception. The proper utilization of resource and understanding the need of consumers in the most accurate manner can be considered to be the primary reason behind sustained financial growth of the company. In comparison with Redbox and Block Buster, the revenues of Netflix are much higher. Netflix has subscribers in over 40 nations across the globe and accounts for 26 million subscribers worldwide. By the end of the year 2013, the net income of the company as reflected in its financial statements was approximately $112 million. At the end of the year 2013 the company accounted for 2000 full time employees (Tan and Netessine, 2009). Intangible One of primary success points of the company is its strong employee structure. Netflix selects its employees exercising careful human resource policies. Competencies of employees are mapped well before they are actually hired. Efforts are also taken to ensure that employee satisfaction is attained. Netflix’s employee hiring strategy is famously known as ‘hire, develop and cut smartly (Tan and Netessine, 2009). Netflix creates an internal environment whereby employees are motivated to perform better and compete effectively. Employee freedom is protected to a large extend as the firm believes that in a creative environment, employee freedom is an important factor for enhancing performance. Netflix is reputed for its fast services in the market of home entertainment. The company therefore takes suitable measures to ensure that the supply chain remains effective enough to deliver faster services in contrast to its rivals (Tan and Netessine, 2009). Key success factors Technology is one of the key elements of success for Netflix. The company has been able to adapt to new technologies and provide services which are up to date with modern business environment. The emergence of the superfast broadband connection has been a contributing factor for the growth of Netflix. Also the effective supply chain system established by the company allows it to make postal deliveries of DVD’s within one business day. In order to ensure effective delivery of services, Netflix has established a number of physical distribution centres which ensure quick delivery and also facilitates meeting the rising demand in the market. The motivating organizational internal environment promotes employee performance positively. The reward system of the company is appreciated widely attracting talented employees from different nations (Tan and Netessine, 2009). Issues and challenges Although Netflix is one of the most famous and successful online movie rental services, it is not free from issues and challenges. The reason why consumers subscribe to Netflix is due to the fact that the content quality of movies is highly superior. The issue which the company is likely to face in the upcoming times is that it would become expensive for the firm to acquire high quality content at cheaper rates (Adhikari, et al., 2012). In order to gain high quality content the firm is required to obtain license from Hollywood or is required to pay for producing the content directly. Netflix is required to bid against Hulu and Amazon in order to gain streaming rights for its content. A number of old deals of Netflix have expired, thereby reducing the quality of the content telecasted. Netflix’s library of endless superior quality movies are seen to decline. The offerings of Netflix are seen to become increasingly similar to that of a premium cable network. The company had lost the rights for streaming a number of recently released blockbuster movies. Such losses ultimately lead to bad publicity. Due to the low price services which the company offers, it becomes difficult to offer high content to consumers repeatedly. Since the company cannot effort to buy the content, it loses the ability to provide what consumers want to watch. The company could try to purchase streaming rights for all major Hollywood blockbuster movies, but that would cause massive investments which cannot be recouped on the basis of the current subscription rates offered (Adhikari, et al., 2012). Many view the bankruptcy of Block Buster as a massive advantage for Netflix. However, it must be understood that Block Buster has not entirely disappeared from the home entertainment industry. The company is seen to undergo reorganization and has been promising to come back into the market in a stronger manner. It is seen that, when companies go through bankruptcy, they are able to lose much of its costs and liabilities (Artero, 2010). The come back into the markets for such companies are strong as they are seen to become sharper and efficient in their operations. Consumers are largely drawn towards such firms as they are often seen to provide services differently from existing firms. Considering the declined services offered by Netflix, the expectations from the comeback of Block Buster is likely to be much awaited by many movie lovers. Block Buster is less likely to grow more than Netflix, considering the massive size, revenues and its market size. Netflix can expect an increased level of competition and loss of markets due to the revival of Block Buster (Artero, 2010). With the increasing popularity of online streaming of movies and downloading of the same, the trend of watching movies on DVD’s have declined considerably. Also consumers are required to wait for at least a day to watch a movie through DVD. Moreover, there has been drastic increase in the online movie watching market since the last few years. As a result, subscribers of online streaming service providing sites have increased drastically. The dependency upon postal services to provide DVD’s to clients is seen to sometimes disrupt the ability of the company to provide its services on time. A number of movie studios have themselves began providing the streaming services. Movie studios consider that they must not let middle men like Netflix to distribute movies when they themselves can provide similar facilities. Hollywood studios have been seen to constantly look for innovative ways to increase revenue. Additionally firms such as Comcast and Redbox are also enhancing their offering to the market in attractive ways, further creating worries for the online movie streaming giant (Tan and Netessine, 2009). Strategic analysis Generation of strategic growth options At its business level, the company makes use of the cost leadership strategy to offer services at the lowest cost as compared to other firms who offer similar services. The low prices offered by the company are one of the most strategic advantages earned by the firm in the market of online streaming. The massive size of the firm and its widescale operations has facilitated it to achieve economies of scale. Other firms such as Redbox and Block Buster cannot afford to charge such meagre prices. The monthly fees and also the rentals charged by the organization are the lowest in the market. The company must make greater use of the diversified strategy to serve different nations. The charges established by Netflix in Europe and in North America are different based upon the demand for such systems and its popularity. While Netflix services are cheaper in America, in Europe the company has not been able to achieve very high growth and therefore charges comparatively higher prices. The economies of scale formed by Netflix, hinders the entry of new firms into the industry. Since Netflix offers its services in a number of markets and has a large number of subscribers, new firms would find it extremely challenging to draw customers away from Netflix and attract it towards itself. Also new firms will not be in the position to charge low prices from subscribers as Netflix does, due to its massive scale of operations. Such factors increases the competitive advantages enjoyed by Netflix by multiple folds (Artero, 2010). Based on the strategic position enjoyed by Netflix, strategic growth options have been created for the company using Ansoff matrix. Figure 1: Ansoff Matrix for Netflix Existing products New products Market penetration Product development Existing markets U.S.A.- Increase subscription by providing better services and attractive packages. Other nations of North and South America- Lower prices by enhancing scale of operations. Europe- Lower prices, increase customer base and provide more offers. Development of new products such as video games, considering its increasing demand. This would necessitate enlarged investments in technology. New markets Market development Diversification Popularize the online retail movie services in regions of Canada, Mexico, Argentina, Chile and Brazil and later U.K. Australasia, and India by offering low cost services. Follow diversified costs and technology strategies suiting the needs of the region. Evaluation of strategic growth options From the growth strategies formulated for Netflix, it can be seen that technology development and cost leadership strategies are the most important factors. What sets Netflix apart from other existing brands in the online movie retailing market is that the firm has the capability of delivering high quality content at the lowest prices. Competitors such as Block Buster, Redbox and Comcast cannot afford to provide services at such low prices. However, the company must focus upon further reducing its costs of operations in some of less penetrated regions of North and South America. Additionally, it is also essential to concentrate upon providing better streaming options, by investing more in technology. It is essential to enhance the technological capabilities as there are a number of companies such as Amazon and various movie studios who are to enter the online streaming options (Artero, 2010). The following framework has been developed to analyse the strategic growth options. Figure 2: SAF framework Cost Technology Suitability Reducing costs is a suitable option in order to maintain competitiveness Promote advanced broad band technology to facilitate streaming. It is also essential to enhance services such as gaming, by investing in technology Acceptability Consumers are likely to accept services at reduced costs. Video games are widely accepted and popular in the markets of Europe and America. Technological progression is also likely to enhance the quality of services offered. Feasibility Cost reduction by a moderate level is feasible in some of the regions, but not all. Massive and wide spread cost reduction may lead to loss of profits. Technological development would facilitate entering new markets such as online gaming and also enhance the quality of services provided. Description of selected strategy Of the discussed strategies, the most essential strategy which the company is required to consider at present is enhancing its technological capabilities. One of the most effective ways of combating rising competition is through improving the technological abilities of the company. Online movie consumers are seen to prefer using services which are hassle free and fast. This requires increased technological investments. Considering the stable financial position which Netflix enjoys, it can easily invest in technological advancement. However, care must be taken so that increased technological investments do not raise the costs of services delivered. Technological investments may also facilitate the company to enhance its competitive position in the market. Netflix has already signed agreements with Warner Brothers to enhance its technological capabilities (McGrath, 2010). Conclusion The strategic appraisal conducted for Netflix clearly reveals that the online movie watching is experiencing a surge. Netflix had already been successful at establishing itself as the leader of the market of online retail movie sector. This makes it easier for the firm to launch new serves, broaden the market area and diversify activities. The strong reputation which the brand has been triumphant at creating for itself makes it easier to gain consumer acceptability. With greater investments in streaming technology, the company’s supremacy in the online movie rental industry is likely to continue. Through increased technological investments, the company’s stock values are also likely to enhance. Netflix must also come up with strategies to enter into the emerging markets of the nation. The growth of the rental DVD segment of the company is seen to become almost stagnant as greater numbers of subscribers are opting for online streaming to watch movies. Systems and technologies used in providing DVD services must therefore be considered to be improved. Signing agreements with distribution and logistics companiesis expected to improve the services in this sector. Reference List Abraham, S., 2013. Will business model innovation replace strategic analysis?. Strategy & Leadership, 41(2), pp. 31-38. Adhikari, V. K., Guo, Y., Hao, F., Varvello, M., Hilt, V., Steiner, M. and Zhang, Z. L., 2012. Unreeling netflix: Understanding and improving multi-CDN movie delivery. Infocom, 2012 Proceedings IEEE, 1(1), pp. 1620-1628. Allen, G. C., Feils, D. and Disbrow, H., 2013. The rise and fall of netflix: what happened and where will it go from here? International Academy for Case Studies, 20(1), p 1. Artero, J. P., 2010. Online video business models: YouTube vs. Hulu. Palabra Clave, 13(1), pp. 5-47. Dess, G. G., Lumpkin, G. T. and Eisner, A. B., 2006. Strategic management: text and cases. Homewood: Richard D Irwin. Hitt, M., Ireland, R. 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