Managing Strategy for Netflix Company - Essay Example

Managing Strategy: Netflix Company Introduction Companies operating in the video renting and streaming industry havefaced stiff competition in recent years as the industry becomes mature. This report focuses on the analysis of operation of Netflix in order to determine the best strategic approach that suits the company’s growth prospects. To achieve this objective, the report is divided into section beginning with an analysis of the external environment inflecting operations of Netflix using the PESTEL framework. Critical success factors for the industry and a discussion of opportunities and threats surrounding Netflix are also discussed under the first part of the report. The second part of the report focuses on internal analysis of Netflix with VRIN framework adopted for conducting an analysis of company resources and capabilities. Based on the identified in the external and internal analysis, part three feature issues and challenges facing Netflix as it strives to remain competitive in the industry. Part four of the report analyses strategic options that will facilitate continued growth and development of Netflix with the ANSOFF Matrix being the analytical tool for identifying the options. Part five of the report evaluates the identified strategic growth options while part six focuses on the selected growth option before lastly making a brief conclusion and recommendation. Company Background Netflix operates in video renting and streaming industry with the company offering channels foe distribution of DVD rental by mail order, internet streaming of content through home devices such as PCs and internet TV. The company uses subscription-based services to customers who pay a monthly fee for both DVD rental and streaming services. The company had initially linked the two services, but has separated them in recent years meaning subscribers will no longer have access to both unlimited DVDs and unlimited online streaming in one subscription plan (Thompson, 2013). PART 1: External Analysis PESTEL Analysis There are a number of political, economic, social, technological, legal and environmental factors with considerable impact on the operations of Netflix. Political and legal factors in the external market relates to laws and regulations regarding access and distribution of content by Netflix and and other vendors in existing in the industry. There is an increased concern about piracy with companies seeking to enhance their control regarding copyrights, patents, licensing and trademarks. While it is difficult for authorities to eradicate, piracy has a negative impact on revenues collected by vendors as it makes content accessible without payment of the necessary loyalty (Netflix, 2012). Laws covering these areas affect Netflix operations as they are connected to the ability of the company to extend its distribution for both DVDs and Streaming markets. Netflix and other companies in the industry are required to follow strict legal requirements on distribution of content as they do not mainly rely on production their own content but relying on production and television companies (Fritz, 2009). Firms in the video rental and streaming industry compete based on pricing to attract more buyers for rental and subscribers for the streaming services. As an entertainment industry, purchases in the industry are affected by the level of disposable income of customers limiting their purchasing power when the economy performs poorly. Social factors also influence the industry revolves around the attraction of younger members to drive sales for companies. The industry is negatively affected by aging population especially in developed countries since most of the customers are from the younger generation. Older members of the population have also demonstrated lower rates of uptake for online content, meaning an ageing population might result in reduced sales for this segment (Ken Research Private Limited, 2013). Additionally, consumers have increasingly demonstrated an appetite for more recent content meaning Netflix has to reduce the difference in time when the movies are released and availability for rental and streaming in order to remain competitive (Thompson, 2013). Companies operating in the video rental and streaming industry have to be in constant review of their technologies as the industry is affected by constant technological changes. For instance, the dynamics of the internet implies that companies such as Netflix have to update their systems to accommodate innovations that continue to reduce internet costs while increasing streaming speed. Additionally, Netflix has to improve services to respond to the competitiveness of the industry that is characterised by competing technologies such as online, streaming, Redbox, blockbuster and video on demand. Five Forces Framework FORCE STRATEGIC SIGNIFICANCE Industry Rivalry High Threat of Entry Low Threat of Substitutes High Supplier Power High Buyer Power Moderate Rivalry in video rental and streaming industry is high due to existence of multiple companies such as HULU, Google Play, Blockbuster and Redbox that also offer similar services to that of Netflix. Although the industry is unregulated entry barrier is high due to the huge costs of capital needed to set up a company in the industry. Competition in the industry also makes increases entry barrier as new entrants can only succeed by offering superior quality services compared to the rest of companies already in operation. Threat of substitute products that might replace those offered by Netflix is high due to existence of multiple interchangeable entertainment viewing formats such as online streaming, internet TV, pay per view and availability of cable television showing the videos. According to Thompson (2013), the current industry situation makes it possible for customers adopt alternative methods of viewing using personal computers and mobile devices such as iPads, iphone, and ipod. Gaining access from content owners to stream, rent videos means the suppliers have a high power during negotiations on revenue sharing, and licensing agreements. Existence of multiple options for customer subscription means buyers in the industry have moderate powers. Any change in prices might result in customers cancelling their subscription and changing their service providers making it necessary to keep subscription costs low. Industry Life Cycle Model The video rental and streaming is divided between offering physical DVDs and streaming services, which means it is characterised by maturity and growth respectively. As many customers shift from renting physical DVDs to streaming and internet TV, the companies are shifting focus from the mature DVD rental services to streaming services (see graph below). Reliance on technology means the industry will continue to shift to new approaches of delivering content therefore generating new growth strategies moving forward. Critical success factors The video renting and streaming industry has greatly benefited from existence of a variety of distribution channels. Successful companies such as Netflix have invested in multiple channels including television and online streaming, mailing and vending machines (Thompson, 2013). These channels ensure companies target a variety of customers including those who need latest releases without being taking through multiple procedures or moving out of their convenient locations. Adoption of latest technologies has also resulted in increasing customer base while maintaining those already existing. Operating in an industry that where companies having to adapt to the changes in technology, there has been investment to match customer demands for faster delivery of DVDs, streaming and downloading while at the same time maintaining high quality services. Opportunities and threats for the subject company Netflix faces three main areas of opportunity including growth in the international market, increased focus on original programming and demand for Internet television in the external market. In the past few years, Netflix has increased in- house programming to supplement the company’s reliance content from alternative production houses. This presents an opportunity for the company increase its stake in the industry while also making it possible for the company to increase revenues (Stelter, 2013). Secondly, expansion into international markets has a potential of increasing the company’s performance in the video renting and streaming industry. With the separation of DVD from streaming business, Netflix has an opportunity to increase presence in the internet television market as consumers have demonstrated increased preference for the technology. While Netflix has a number of opportunities that will enhance the company’s performance in the coming years, there are some threats that must be considered when making current and future plans. Firstly, the market share controlled by Netflix has demonstrated volatility due to increased competition offered by other service providers such as HULU, Amazon, and Apple TV with YouTube being the latest major entrant into the streaming business. Competition from these companies will continue to exert pressure in the industry with Netflix needing to improve company strategy in order to attain its projections. PART II: Internal Analysis Conducting an internal analysis of Netflix is important as it helps identify the company’s resources and capabilities necessary to establish competitive advantage in the industry. One of the effective frameworks for establishing the company’s resources and capabilities is the VRIN model developed by Barney (1991). Analysis of Netflix, internal resources reflects mixed outcomes for a company does not possess stores in the physical form of brick-and-mortar. Traditionally, movie rental companies such as Blockbuster have depended on owning the physical stores for distribution purposes but Netflix has successfully entered the home media entertainment using its online platforms and renting DVD by mail (Netflix 10-K 2013). The company was successful in the past due to continued dwindling business for the brick-and-mortar industry segment resulting in Netflix gaining control of about 1/3 of the North American market(Protalinski, 2013). Although the number of Netflix subscribers has continued to increase, the company has continued experience fluctuations in the valuation of shares, as it is no longer a market leader in the video rental and streaming industry (Thompson, 2013). However, the company still enjoys a number of valuable resources including its size, catalogue system for online and superior destitution channels. Netflix enjoys valuable resources in the form of easy to use website interface and fast reliable mail platform for rental DVD. Consumers in the video renting and streaming industry are mostly keen on immediate fulfilment of their demand for particular movies making Netflix’s DVD-by-Mail services rare in the industry. Through established networks, Netflix has ensured customers receive their order in the shortest time possible depending on their location. Fast response to industry demand is also an essential resource for the company as it has enabled it remain ahead of competitors in multiple occasions including being the first to introduce the platform for internet delivery of TV Shows and movies (Netflix 10-K 2013).  The unique rental catalogue also continues to be an inimitable resource for the Netflix as current licensing agreements prevents content providers from conducting business with other vendors based on a similar platform. However, the services offered by Netflix is substitutable due to existence other companies that also offer the services. This means the company finds it difficult to establish competitive advantage against companies such as HULU, Google Play, Blockbuster and Redbox (Fontinelle, 2014). Value Chain Model See chart 1. Competency Framework Netflix competencies lie in the size of their library as the company regularly extends collections through negotiations with different providers. However, as seen from the Backlash experienced after the announcement of separation of mail services from streaming, the company has poor PR strategies especially in terms of communication. However, the company’s distinctive competency has been adaptability to the market conditions which has enable it continue to shift operations to suit customer needs. Comparative analysis of Netflix’s internal capabilities against critical success factors for the video renting and streaming industry reveal important areas of strategic fit. The company has responded with ease to the demands of technological change that characterised the industry. New technologies such as streaming via internet TV were immediately adopted when they were available in the industry. The need for flexible distribution channels has also been addressed based on the online streaming and downloading platforms in addition to the delivery by mail services. PART III: Issues and Challenges Among the challenges, facing Netflix is the negative reception of its restructuring polices by both the customers and investors. Since the company announced plans to split DVD, renting business from online business, a number of backslashes that forced management to reconsider its decisions. Customers have expressed their dissatisfaction with the restructuring process that has resulted in increased monthly subscriptions of by up to 60%. Before separation of unlimited streaming from unlimited DVDs, customers paid $ 9.99 for both service but they have been forced to pay $7.99 for either of the services. This decision has led to drastic increase in cost of accessing both services for customers who were used to a one-off subscription (Thompson, 2013).Additionally; expansion into new markets has failed to meet targets that were set at the beginning of the process for most of the targeted markets. The company will have revise its prospect for most of the new market as breaking even within the predetermined eight quarterly years becomes unattainable (Hutchinson, 2014). While estimations for locations such as Canada and UK were relatively accurate, Netflix has experienced greater challenges in expansion quest for regions such as Latin America. Latin America presents unique challenges to the company due to the poor development of infrastructure that supports both video renting and streaming services. To achieve the targeted sales, there is need for the company to increase investment towards marketing as large sections of the population is still no aware of the concept of on-demand streaming video apart from piracy and YouTube. However, greater challenges are in enhancing customer experience for the internet streaming market in a region where a small section of the population is connected to slow internet. Low credit card usage is also part of the problem with financial institutions failing to support ecommerce due to the perceived risk of fraud. PART IV: Generation of Strategic Growth Options The ANSOFF Matrix provides insights into the best strategic growth options that a company should take in order to remain competitive in the industry. Firstly, market penetration refers to the option a company takes when choosing to concentrate is growth prospects in existing markets. For Netflix, market penetration involves increasing company participation in the US market. Focusing on the US market will allow the company to increase the level of purchasing and usage for all its products while also increasing customer base by attracting new subscribers. As determined from the competitive analysis of the external market, the company faces increased competition from other firms such as Redbox, Google, Amazon and blockbuster that target online streaming and DVD renting. Consequently, focus should shift to generation of competitive advantage in the US market through strategies and that increase customer base and revenue collection. In market development, refers to organizational strategy where the company focuses growth strategy towards to increased presence in new markets that might represent regions or countries. This strategy has greater growth potential for Netflix especially in North American countries such as Canada and in Europe as seen in the case of UK (Thompson, 2013). However, success attained in this regions are as a result of advanced technologies in the regions, which makes it easy to accommodate the demands of the video renting and streaming industry. Lessons learned in regions such Latin America where infrastructure to support the industry is still poor means the company will be highly selective when launching services in new markets. Increased competition in movie renting and streaming industry provides an opportunity for Netflix to invest in product development as a growth strategy that will ensure the organization increases its offering to customers. Among the areas of product development that Netflix can target is the introducing new operations in areas such as video and computer games. Market for video and computer games has recorded significant growth in recent years therefore presenting an opportunity for the company to increase sales (Basak, 2014). PART V: Evaluation of Strategic Growth Options Given the realities in video renting and streaming industry, Netflix faces three strategic growth options that can steer the organisation into further success. These options include strictly focusing on the US market to attract more customers, increasing presence in new markets by entering new countries and regions and developing new products such as video and computer games to supplement revenue generated from the video renting and streaming business. The SAF framework provides important criteria for identifying the best growth strategy under industry conditions affecting the operations of Netflix. Firstly, focusing in the US market is the best strategy for Netflix as this represents market segment that generates greatest revenue for the company. The domestic market has continued to support company expansion strategies due to high number of new subscribers joining every quarter. While international segment has continued to reflect sizeable losses due to slow growth, the domestic market has shown resilience against stiff competition to record greater margins. The contribution margin of 10 % to 12 % generated from streaming by domestic subscribers represents higher margins compared to the projected 8% during 2012 (Thompson, 2013). This level of activity in the US market indicates its contribution towards profitability of the company as international expansion continues to record massive losses. Growth strategy focusing on the domestic market meets the three criteria of suitability, acceptability and feasibility as it represents the ability of the organisation to take advantage of existing opportunities, satisfy stakeholders in addition to existence of skills and resources. Focusing on international market is also another option for management at Netflix as it presents an opportunity to increase subscription from potential customers. This growth criterion is suitable as it relates to the organizational need to increase its scale of operation to cover new markets as a strategy to reduce pressure in the domestic market. Expansion into international market has come with mixed results for Netflix due to continued losses experienced in countries and regions where the company has also already initiated operations. However, expansion into international market faces acceptability challenges due to losses that increase shareholders concerns about return on their investment. International business also fails in the feasibility criteria, as focus on such expansion will require more finances and employment of people with skills on particular markets. PART VI: Description of Selected Strategy From the evaluation above, focusing on the domestic market with the United States is the best option for Netflix bearing current industry dynamics. Focusing on the domestic market provides an opportunity for Netflix to introduce more customer-oriented services for majority of subscribers. Given the highly developed internet infrastructure in the domestic market, Netflix should invest in areas that will generate future core competencies as people shift to ecommerce as their main avenue for making purchases. Continued shift in customer preferences from mail order DVDs mean the company must now focus on expanding its online streaming library. Netflix projections indicate the company will maintain its DVD renting by mail up to 2030. Even with this projection, it is expected that rental figures for domestic market will experience a greater decline in the coming four to nine years (Wingfield, 2009). Therefore, a focus on the domestic market will result in greater growth for the streaming segment as the company strategise to end the DVD renting by mail services. PART VII: Conclusion Netflix is one of the most success companies operating in the video renting and streaming industry as seen from the levels of revenue collected and subscriptions generated on company site. However, the company has faced a number of challenges in both the external and internal environments as it strives to maintain its market position and share. Operating in an industry that is reliant on technology means Netflix has to adopt latest innovations in order to overcome competition presented by companies such as Apple Redbox, Blockbuster, Apple, HULU, Amazon and Google. In recent years, poor decision-making by management has led to a reduction in subscription while company share value weakens. However, the company still has avenues for growth especially if focus shifts to profitable areas that can sustain organisational operations. It is recommended that Netflix should reduce its focus on the international market since to the expense of domestic market. Continued investment in risky international markets that lack suitable infrastructure pose a great danger to sustainability of the company revenues from domestic sales might not cover this expensive venture. Appendices Chart 1: value chain analysis for Netflix Outbound logistics Establishing relationships with content providers, effective physical distribution methods Operations: Maintenance of website, quality customer service and distribution channels Outbound logistics Maintain distribution channels for mail delivery, Improve subscriber access to videos on websites Sales and marketing Improve demand Advertisement in different media spaces; TV commercials, ads in print and websites Use of word of mouth marketing strategy Services Offer free shipping for movies Customer services through FAQ and live chat support References Barney, J., 1991. Firm resources and sustainable competitive advantage. Journal of Management, 17, 99-120. Basak, S., 2014. U.S. Video-Game Industry Sales Increase 8% on Consoles. Bloomberg [online] 12 September. 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The US Video Rental Industry Outlook to 2017 - Subscription streaming and Internet Video on Demand to Sustain the Future Growth. New Delhi: Ken Research Private Limited. Netflix, Inc., 2012. Form 10-K 2012. Netflix Website database for Investors [online], 30 June. Available at: http://files.shareholder.com/downloads/NFLX/2687952341x0x658002/2604be28-a3d3-49e6-a504-df6cb4856a02/2012_10K.pdf [accessed 10 January 2015] Protalinski, E., 2013. Sandvine: Netflix owns one-third of North American traffic at peak, has doubled its mobile share in 12 months. The Next Web [online], 15 May. Available at: http://thenextweb.com/insider/2013/05/14/sandvine-netflix-owns-one-third-of-north-american-traffic-at-peak-has-doubled-its-mobile-share-in-12-months/ [accessed 10 January 2015] Stelter, B., 2013. A Resurgent Netflix Beats Projections, Even Its Own. New York Times [online], 23 January. 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