Netflix Managing Strategy - Essay Example

Managing Strategy Contents Introduction and company background 3 External Analysis 4 PESTEL 4 Porter’s Five Forces 5 Industry Life Cycle 6 Identification of CSF 7 Internal Analysis 8 Competency Framework 8 VRIN Framework 10 Value Chain 11 Generation of strategic options 12 Strategic option evaluation 14 Description of chosen strategy 15 Conclusion 16 References 17 Introduction and company background Strategic management plays a vital role in business operations. In present scenario business strategies forms the basis of company’s success and growth. There are wide array of strategies being implemented by organizations to remain competitive in the market place. This approach encompasses implementation and formulation of major initiatives and goals. Strategies are mainly designed by top management of a company taking into consideration internal resources and competencies. It is even responsible for providing direction to a company comprising of organizational objectives, designing plans to accomplish set objectives and allocating appropriate resources in order to execute set plans. In this particular study different strategic frameworks shall be incorporated so as to analyze external environmental and internal conditions of Netflix. These tools will not only help to identify key resources and competencies but even facilitate determining critical success factors. In broader context these factors are highly responsible for acquiring sustainable competitive advantage. Michael Porter states that a strategy provides valuable and unique market position to a firm. A strategic fit needs to be achieved by a company in order to align business activities with overall business strategy. Business strategy can be defined as developing, finding and formulating a doctrine so as to ensure long-term success. Strategic thinking and strategic planning approaches are closely knitted with the framework of strategic management. Netflix is an organization founded in 1997 and providing Internet streaming media on demand to wide base of viewers. It has its viewers located across South and North America, and certain parts of Europe such as Norway, Netherlands, Denmark, France, Ireland, Sweden, United Kingdom, Finland, Belgium, Switzerland, Germany, Austria and Luxembourg. The company is even involved in sending DVD by mail at flat rate in various locations of United States. Netflix has implemented a subscription based model within its system. Members are able to choose from wide range of subscription plans encompassing option of unlimited streaming movies or media. This study shall not only highlight current strategies been followed by the firm but even would focus on available strategic options for future development. External Analysis PESTEL Netflix is a well-known organization operating in movie rental industry. The company is subjected to political, social, technological, economic, environmental and legal conditions. In legal and political context, the company is greatly affected by changing laws. These laws are mainly related to copyrights of content types like television shows and movies. The company is dependent on these laws in order to provide required service to customers. Any specific changes within copyright law tend to drastically impact distribution of content since it constitutes large portion of product offering. To sustain competitive advantage it is essential that organization set competitive prices. Netflix operates in such market segment where its revenue margins are dependent heavily on customer’s disposable income. Any kind of turmoil in economic conditions results into decrease of customer’s purchasing power. Culture is also playing a vital role in driving growth of Netflix. The firm relies upon movie popularity amongst target market segment. Business could be affected negatively due to average population becoming older who has less inclination towards movie consumption. If the trend of online movie consumption lost its importance then Netflix shall suffer huge losses because more movies are being streamed online (Paskin, 2013). The firm has its overall business activities based on Internet and hence it needs to be aligned with emerging technological changes. Technological up-gradation also removes any form of entry barriers in context of streaming content. Environmental policies are strict in United States and Europe, that needs to be incorporated by the company and effective measures are taken to reduce impact on environment. Porter’s Five Forces There are some external factors that affect business functions of Netflix as stated in figure1. Figure 1: Porters Five Forces (Source: Lasserre, 2012) Intense competition is witnessed in movie rental industry due to easy availability of DVDs in brick and mortar stores. The company faces tough competition from Blockbuster which is a movie rental powerhouse. Blockbuster has its rental stores located worldwide and secures revenue margin of $975 million as per financial year 2012. Blockbuster offers video games and movies for rental and sale. The largest winner in this segment is Redbox that rents out DVD discs. It has adopted vending machine based phenomenon to make DVD kiosks service available across retail stores, supermarkets, food outlets, etc. Intense rivalry in this market segment is mainly in terms of Internet streaming and VOD. Though Netflix is stated to be the leader in Internet streaming activities but there are other rivals with desirable financial strength and creative ideas. The two most important rivals of Netflix are Hulu Plus and Amazon Prime Instant Video. There is large number of substitute products available such as cable network offering wide range of movies to customers. Comcast Cable offers on-demand service that is a substitute product for Netflix since it is more convenient for customers and it is already placed at home. The entry of news players is relatively high due to inexpensive streaming content which is available to all potential distributors. Bargaining power of customers is high because they might prefer to spend their disposable income on alternative entertainment products or services. In current scenario Netflix is not indulged into producing own content (Lasserre, 2012). Hence studios supplying these contents possess a high bargaining power. The business model could be affected if suppliers discontinued with the contract giving extreme leverage to them for contract negotiations. Industry Life Cycle The industry life cycle is similar to that of product life cycle. There are certain stages of industry life cycle as outlined in figure 2. Figure 2: Industry Life Cycle (Source: Mintzberg, 2006) As per figure 2, every firm has to pass through different industry lifecycle stages. The first stage is introductory stage, then its growth stage, maturity stage and decline stage. Movie rental industry is a booming sector and various players are entering into this segment. It can be stated that this industry is at its maturity stage. This is simply because more number of cable operators are providing on demand rental movies and video games. Companies like Netflix, Blockbuster, etc., are being affected by this trend since customers are not willing to subscribe monthly movie programs. Though profit margins are high in this industry but inappropriate innovations might lead to loss of market share. On the other hand, in maturity stage companies should continuously develop new products or services to attract target market segment and acquire desirable percentage of revenue margins. Identification of CSF On basis of external analysis it can be stated that critical success factors of the firm is its market share. In DVD rental business Netflix is known to be the market leader. It has transformed into a household brand gaining 75% of market share. The company is able to maintain economies of scale through flexible infrastructure, online interface and low operating costs. Netflix currently has adopted multi-tiered subscription fees in order to attract large base of customers. The firm comprises of wide base of inventory like 72 million discs, 100,000 titles, obscure films, new releases and television shows. Success of the company is totally based on its effective strategies and focusing on customer value creation. It creates value through rating previously viewed films of subscribers and then recommending customized DVDs (Blair, 2010). The major external threat to be witnessed by Netflix is growing studio power. Studios might decide to reduce 4-6 week gap between VOD releases and DVD releases. Other threats for the firm are intensively competitive market segment and unpredictable video rental industry. External analysis of the company even helps to determine certain market opportunities like digital distribution, profit sharing schemes and partnerships, and subscription growth potential. Internal Analysis Competency Framework Competency framework can be defined as the skill and the knowledge that is required by the organization. It is required by the people who are engaged with the organization to have competency to perform well and properly in the organization. Developing competency framework is a critical and crucial task as it has to suit and match the requirement of the organization. The main step that is included in designing the competency framework is defining the purpose for which the framework has been prepared then collecting the data or information for developing a correct and accurate framework. For collecting information the organization is required to analyze the work then implementing the strategy. In case of Netflix which is regarded as the largest service provider for online entertainment subscription and has changed or modified different ways by which the people provided movies on rent and broadcasted the TV shows. The employees of Netflix has adopted competency framework by employing a subscription based business model by the company. Netflix has developed its competency in such a way that it has defeated its competitors and developing and strengthening the brand image of as well as reputation of the company and becoming the leader of the industry. Netflix has improved and developed its competency by starting the bundling. It provided options to its members to choose from the various subscription plan of the company. Netflix has currently implemented some strategies and it has resulted into customers shifting into substitute products or services. The company had increased its subscription fees by 60 percent. There were different subscription plans for customers and those who demanded for unlimited DVD or unlimited streaming had to apply for both plans. This in turn reduced customer base of Netflix due to increase in price rates. Customer reaction was highly negative and comments were observed throughout Netflix website. The stock prices of the firm also dropped because of the rumour that around 600,000 customers had withdrawn Netflix subscription. Netflix in current scenario was witnessing intense competition in the market place. There were other players supplying similar services at competitive prices. On the other hand, price rise in Netflix subscription was not properly communicated to its customers. Netflix is not involved in producing own content and simultaneously it needs to rely on third party for delivery of DVDs. There is constant price increase or increase in surcharges by U.S. Attorney General. This in turn makes it difficult to control operating costs and reduce subscription fees. The company offers 1700 choices in context of streaming content. It has to compete effectively with other players offering free content such as Hulu, NBC Universal, The Walt Disney and News Corporation. Movie rental companies like Netflix has to rely heavily upon content licensing deals. These deals are basically made with studios who possesses right to media. Figure 3: competency framework The image focuses on the various aspects and elements that contribute towards increasing and developing the competencies of the employees of the company. VRIN Framework Taking into consideration the four important characteristics of the VRIN framework it has been observed that Netflix is required to maintain sustainability for gaining competitive advantages. It can be observed through the analysis by applying VRIN framework that the company will not be able to maintain its sustainability as a lead position in DVD by mail and streaming of the online digital in case of its entertainment industry. On the basis of analysis by applying the VRIN framework it is visible and it is observed that the firm possess a valuable resource in terms of its size. Netflix online interface and Netflix DVD by mail adds value to the customer base of the company that is no longer able to attract and provide rent at a brick and motor location. At the time of interacting with the customer base of the company it has been observed that Netflix has remarkably reduced the overhead cost of the brick and mortar locations of the company. The company gained the value proposition of being considered as the only company to offer the convenience and ease of DVD by mail in case of its home entertainment and online streaming by Netflix which is now not considered as a unique and special service due to the advancement in case of the online content distribution of the company. Due to the advancement in the technology the products of Netflix has become less non substitutable for sustaining and gaining competitive advantages in the market place. Figure 4: VRIN Framework Value Chain By analyzing the value chain in case of the Netflix it can be observed that it is surrounded with the various activities and resources. The supporting activities of Netflix are very advantageous for improving the infrastructure of the company and the development of technology of the company. The primary activities of Netflix are related to reducing the logistic cost and increasing the sale. Netflix has the ability for forecasting and predicting the demand accurately and precisely since the revenue generated by the company is based on the subscriptions. Netflix has focussed and provided importance in developing its services for improving the competitive advantages of the company. Netflix has also provided importance on developing the customer relationship management. The company emphasized on satisfying each of its customers and providing the best services. Netflix has focused on improving the value of the company. On the case it can be observed that the gross profit of the company has increased each year. The net income of the company has also increased which signifies that the company earning a good amount of return to cover its cost and expenses and expand its business in the competitive market. When the cash flow of the company is taken into consideration it has been observed that the net cash flow from operating activities has been increased but cash flow from financing and investing activities have been decreased when the cash flow from 2000 to 2010 is taken into consideration this signifies that the company is required to strengthen its equity base. Figure 5: Porter Value Chain Generation of strategic options Netflix should make a commitment towards developing streaming content. In order to remain competitive in market place the firm needs to expand aggressively in terms of streaming content library. This form of strategy would enable the company to be aligned towards a shift from online rental movie industry towards model of streaming content consumption. The long term commitment of Netflix can be divided into three strategic options supported by Ansoff matrix as stated in figure 3. Figure 6: Ansoff Matrix (Source: Simerson, 2011) As per figure 3, the company can incorporate two forms of strategies into its system like product development and market development. Product development basically means incorporating new features into existing product line or designing brand new products. This shall support the firm to gain high revenue margins and capture maximum percentage of market share. On the other hand, market development is also an innovative mechanism to offer existing products in new market segment. This kind of growth strategy is usually implemented when a company is witnessing tough competition in its existing markets. The first strategic option shall be acquisition of Hulu Plus. It would eradicate one of the strongest contenders from the industry and enhance market share of Netflix. Hulu Plus comprises of 40 million visitors as their customers. This will provide the company with a sustainable competitive advantage in context of movie streaming content and television. Netflix shall even acquire intangible asset of knowledge through this acquisition. The company should even be inclined towards decreasing postage expense by building a strong library of streaming content (Stelter, 2013). This decrease in postage cost would initiate reduced subscription fees. Increased revenue margins gained by the company due to reduced subscription fees shall be allocated towards streaming content acquisition. The high revenue margins gained by the company because of Hulu acquisition or reduced postage expense can be utilized for forming revenue flexible revenue sharing contracts. These contracts would be majorly structured for acquiring contents that is not secured through acquisition. Strategic option evaluation SFA framework is a strategic tool that is implemented in order to evaluate set of strategic options. There are three strategies identified in the previous section and they shall be ranked against suitability, feasibility and acceptability criteria. The ranking would be done on a scale of 1 to 5 where 1 stands for weak and 5 means strong. Strategies been identified are stated as Strat1, Strat2 and Strat3.   Criteria Strategies     Strat1 Strat2 Strat3 Suitability Market share growth in next 5 years by 20% 4 3 2   Proper utilization of brand image 3 3 3   Optimization for profitability for product diversification and global expansion 2 2 2 Feasibility Operational cost within budget of $60M 2 3 3   Sufficient skilled and knowledgeable workforce 3 2 3   Strong financial arm 2 2 2 Acceptability Positive stakeholder reaction 4 2 3   ROCE increased by 10% in next 3 years 3 3 2   ROI in 5 years 3 2 3   Total 26 22 23 The framework clearly states that there are two strategic options most suitable for the company. These strategies of Hulu acquisition by Netflix and flexible revenue sharing contractual agreements would facilitate long term growth and development. On basis of the ranking, Strat1 is most appropriate for the organization. This shall provide the firm with sustainable competitive advantage in context of streaming content media. Description of chosen strategy The strategy of Hulu Plus acquisition would add value to Netflix’s overall business operations. Firstly the major advantage the firm will get is in terms of elimination of the biggest rival. This shall increase market share of the firm in streaming content industry. Hulu, LLC has a wide base of customers and this can be effectively acquired by Netflix. It can be estimated that in next 5 years Netflix will be able to expand its customer base to 5 million subscribers. On the other hand, the firm can even strengthen its online streaming content library with the support of News Corp., Disney and NBC Universal. This will give the company a competitive advantage from this wide array of content providers. Netflix through this acquisition will not only acquire content and customers but even large knowledge base. The firm comprises of financial strength to support such acquisition and expand on its market share. Internal capabilities are mainly in the form of skilled workforce, financial base and industry experience. These capabilities are enough to enhance strategic implementation. This strategy is appropriate because it will enable successfully reaching target customers. External environmental analysis states that the company is witnessing tough competition and needs to possess more skilled workforce. Competition can be efficiently encountered by acquiring top employees from Netflix. Conclusion As per this study strategic management plays a critical role in performing business operations efficiently. Netflix over the years has been actively involved in providing movie rental service to its subscribers. The competition has rapidly increased in movie rental industry in the last few years. On the other hand, companies operating in this segment are highly dependent on content providers and distributors. This in turn increases bargaining power of suppliers specifically in case of Netflix Inc. The company is not actively involved in producing its content. Its major competency is in the form of skilled workforce, financial strength and innovative subscription plans. However the company is facing challenges in terms of maintaining its customer base since it has increased subscription fees. Customers need to pay higher prices for accessing rental DVDs and movies. Subscription charges are higher in Netflix in comparison to other players in the market place. Strategic review of the company has outlined its major strengths and weakness, Resources and competencies of the company are sufficient enough to implement business strategies. External and internal analysis of Netflix states that subscription charges can only be decreased when operational costs of the company are effectively managed. This can be done through reducing postal charges and acquiring a more profitable company. Hulu Plus is one of the biggest rivals of Netflix and acquisition shall facilitate wide base of skilled workforce. This strategic implementation will even initiate expansion of customer base that can provide sustainable competitive advantage. Netflix needs to be focused towards securing new content so as to ensure high service quality for its customer base. References Blair, N., 2010. Epix, Netflix announce deal to stream movies. Tysons Corner, VA: Gannett. Lasserre, P., 2012. Global strategic management. Singapore: Palgrave Macmillan. Mintzberg, H., 2006. Crafting strategy. Harvard Business Review, 46(2), pp. 239-342. Paskin, W., 2013. Netflix resurrected arrested development. next up: Television itself. New York: Conde Nast. Simerson, B.K., 2011. Strategic planning: A practical guide to strategy formulation and execution. USA: ABC-CLIO. Stelter, B., 2013. Netflix hits milestone and raises its sights. New York: NYTC. Read More