Internal Analysis for Netflix Inc - Coursework Example

Internal Analysis for Netflix Inc.

Netflix Inc. is a California-based internet entertainment company that offers subscription video-on-demand (SVoD) services. Since Netflix’s founding by Reed Hastings and Marc Randolph in 1997, the organisation has grown by leaps and bounds to attain pole market position in its niche globally (Castillo, 2017). Initially, the company offered DVD rentals via mail and only introduced subscription services in 1999 (Rodriguez, 2017). Nearly 10 years after Netflix’s founding, the company initiated its revolutionary video streaming services, taking advantage of the well-established internet infrastructure in the United States (Rodriguez, 2017). Currently, Netflix has approximately 109 million subscribers spread out across 190 countries receiving millions of hours in TV shows, as well as movies on a daily basis (About Netflix, 2017). A notable advantage of Netflix is that subscribers are at liberty to resume play and pause video content on virtually every Internet-connected screen, without interruptions from commercials (About Netflix, 2017). Netflix’s resources and capabilities serve, in large part, to give the organisation a sustainable competitive advantage.

VRIO Analysis

A VRIO analysis of Netflix’s services demonstrates that the organisation’s resources and capabilities give the company a sustainable competitive edge. Enders, König, Hungenberg, and Engelbertz 2009, posit that a VRIO analysis deals with four key elements with regard to an organisation’s resources and capabilities. The elements include value, organisation, rarity, as well as imitability.

Value

With reference to value, the VRIO analysis examines whether the resources owned by an organisation allow it to exploit opportunities and neutralise threats that are present in the organisation’s business environment (Enders et al., 2009). Cardeal and Antonio (2012) observe that resources generate value in instances where they enable the organisation to come up with strategies that enhance its efficiency, as well as effectiveness. Netflix possesses a host of resources, in addition, capabilities that allow the organisation to exploit opportunities and neutralise threats in its external environment. First, Netflix has the requisite resources and capabilities to produce its own TV shows that appeal to a wide audience in the US market. In 2013, Netflix released its first original TV show, House of Cards (Sharma, 2016). This release allowed Netflix to stream its first original content and helped rupture extant barriers between conventional television and online television (Sharma, 2016). Later on, Netflix went ahead to release additional original series such as Orange is the New Black, as well as Hemlock Grove among others, all of which are highly popular in the global market. Original TV shows produced by Netflix serve to create value for the firm’s customers and in fact, a huge proportion of subscribers in the US market subscribe to the firm’s services courtesy of Netflix’s original content. It is thus clear that Netflix's production resources, as well as capabilities, are critical to the organisation’s ability to exploit opportunities and neutralise threats in its external business environment.

Financial resources also constitute an additional resource that serves to generate value for Netflix’s clientele. A huge proportion of video content streamed by Netflix online is not produced in-house and the content’s producers include third parties. As a result, US laws necessitate Netflix to acquire streaming rights from third-party video content producers prior to streaming their content online. Netflix’s financial resources enable the organisation to pay for streaming rights to thousands of movies, television shows, and documentaries. The organisation’s financial resources are also bound to burgeon with the increasing year-on-year uptake of SVoD services. In the third quarter of 2017, for instance, Netflix registered a 30% increase in revenue, largely buoyed by higher subscriber numbers globally (Hufford, 2017). Predictions demonstrate that internet video will register a CAGR of 34% between 2008 and 2018 (Chao, Hegarty, & Fray 2016). Growth in the financial resources held by Netflix enhances the organisation's ability to acquire streaming rights to additional video content and ultimately creates value for the final consumer. Hufford (2017) observes that in recent years, Netflix has dedicated a significant sum of money on the development of original TV shows such as The Crown, as well as Stranger Things. In addition, the organisation has intentions to expend roughly 8 billion US dollars on content in 2018, far outdoing key competitors HBO, Hulu, and Amazon (Hufford, 2017). Financial resources are also critical to Netflix’s ability to expand its market reach and diversify its product portfolio, all in a bid to generate value to the consumer. Clearly, Netflix’s financial resources allow firm to seize existing opportunities and neutralise threats within its business environment.

Netflix’s online streaming competences also constitute a key value generating capability that enables the firm to exploit opportunities and neutralise threats within its business environment. Netflix’s internet infrastructure gives the company the capability to stream high-quality video content online. The firm utilises Microsoft Silverlight in video streaming and does not provision for other video streaming containers (Rao et al., 2011). Netflix possesses the capacity to stream High Definition video content with an average bitrate of 3.6Mbps as of 2012 (Adhikari et al., 2012). Netflix’s utilisation of cloud computing services and CDNs, as opposed to individual data centres, allows the firm to provide a platform for streaming video content that is large scale, highly available and scalable (Adhikari et al., 2012). Netflix also serves out video streaming via multiple CDNs, in addition to UltraDNS, all of which are critical capabilities that deliver quality SVoD to the final consumer. Evidently, Netflix’s online streaming competences generate value and consequently allow the firm to seize extant opportunities in the business environment.

Rarity

In the context of a VRIO analysis, the aspect of rarity examines the number of competitors that have control over a given resource (Enders et al., 2009). In this regard, a rare resource or capability has few competitors who control it, and the organisation that has access to the resource possesses a decisive competitive advantage over its peers (Enders et al., 2009). Several of Netflix's resources and capabilities have a varying degree of rarity. Netflix’s online streaming capabilities are not rare and the niche has several market players, the most prominent in the US market being HBO, Hulu and Amazon Prime (Hufford, 2017). In other markets such as India, Netflix's online streaming capabilities face stiff competition from market players who have wider access to local content. Sadq 2015, notes that as of 2015, the primary competitors of Netflix in the US market included Redbox, Blockbuster, and Amazon. Netflix’s DVD rental capabilities in the United States are also not rare since the niche is dominated by four key players who include Redbox, Blockbuster, Netflix, and Amazon (Chopra, Chopra, Veeraiyan, and Veeraiyan, 2017). It is thus abundantly clear that the degree of rarity associated with Netflix’s resources and capabilities does not give the firm a sustainable competitive advantage.

Imitability

Within the VRIO framework, imitability refers to the ease with which a firm’s capabilities or resources can be replicated by other firms and industry players (Enders et al., 2009). Only imperfectly imitable resources can create a sustainable competitive advantage for organisations (Enders et al., 2009). According to Cardeal and Antonio (2012), socially complex and path dependent resources are inherently difficult to replicate. In addition, factors such as intellectual property rights, associated costs, and lengthy imitation processes affect the imitability of a resource or capability (Cardeal & Antonio, 2012). In the case of Netflix, the firm’s online streaming capabilities and resources do not enjoy imperfect imitability. In 2015, for instance, the US video streaming market saw the entry of several entirely new video streaming players some of whom included NBC’s Seeso, as well as Sony’s Vue (McAlone, 2016).

It is worth noting, however, that despite the perfect imitability reminiscent of online video streaming, Netflix Inc., and Hulu still control 98 percent of the non-cable video streaming niche in the US market (McAlone, 2016). Netflix’s DVD rental business does not also enjoy imperfect imitability. Despite the relative imitability associated with the Netflix’s DVD rental business, particularly in the US, the industry has registered a steady decline in recent years. In 2017, the industry registered 2.8 billion dollars, a significant drop from the 5.89 billion dollars in revenue observed in 2012 (The Statistics Portal, 2017). In addition, Redbox, a major industry player in the DVD rental business, is on its deathbed just like a former giant, Blockbuster (Spangler, 2016). As such, industry unattractiveness, as opposed to the perfect imitability associated with the DVD rental business serves to repel potential and novel players in the industry. It is thus pretty apparent that the imitability associated with Netflix’s resources and capabilities does not give the firm a sustainable competitive advantage.

Organisation

Organisation, in the context of a VRIO analysis, denotes a firm’s organisational structure, in addition to the structure’s ability to make use of the power linked to imperfectly imitable, valuable and rare, capabilities, as well as resources (Enders et al., 2009). Solely the attainment of the far-reaching potential associated with powerful resources via ideal organisational structures allows a firm to enhance value created, as well as value captured (Enders et al., 2009). Netflix’s organisational structure allows the firm to enhance any value it generates. Netflix is headed by a chief executive officer in addition to a board of directors that is responsible for policy and strategy formulation (Corporate Governance, n.d.). Additional positions within Netflix’s organisational structure include the chief marketing officer, chief talent officer, general counsel, as well as the chief financial officer among others (Corporate Governance, n.d.). This organisational structure is critical to Netflix’s capacity to make use of the power linked to imperfectly imitable, valuable and race, capabilities, as well as resources.

A Value Chain Analysis (VCA) of Netflix Inc.

According to Ensign 2001, a VCA allows organisations to conceptualise the activities and processes that are required in providing products and services to consumers. It also serves to illustrate the manner through which services and products gain value as they transition from conceptualisation, design, production, service, marketing, and delivery to the final consumer (Ensign, 2001). Value chain models demonstrate the specific configuration of processes and activities that are required in the generation of value (Ensign, 2001). Netflix’s value chain is pivotal to the firm’s ability to attain a competitive advantage over rival industry players. At the delivery stage of Netflix’s value chain, the firm creates value to the final consumer by utilising less bandwidth, as compared to competitors such as Amazon. Spangler (2016) observes that Netflix recently improved its video-encoding efficiency. In 2016, the organisation made changes to its video-encoding system resulting in minimised bit rates of roughly 20% without compromising on video quality (Spangler, 2016). Adhikari et al. (2015) assert that Netflix provides video content at varying quality levels that have the capacity to adapt to the bandwidth available to the consumer. As such, the consumers’ selection of standard definition, high definition (HD) or ultra HD video content is contingent upon the consumer’s available bandwidth and this puts Netflix is in a better position to generate value to its clientele.

At the design and production stages of Netflix’s value chain, the organisation also aims at creating value for the final consumer. Netflix’s video packages are designed such that standard quality video content necessitates a 3mbps internet connection speed while a high definition and Ultra high definition video contents require an internet connection speed of 5mbps and 25mbps respectively (Help Center, n.d.). The end user also has the option of changing video quality in order to minimise bandwidth usage (Help Center, n.d.). The ability to control bandwidth usage serves to create value for the consumer primarily because it allows them to save on costs associated with high bandwidth utilisation. It is thus clear that Netflix’s conceptualisation, design, production, service, marketing and delivery phases of its products and services are aimed at generating value for their final consumer.

To conclude, it is evident that Netflix’s resources and capabilities serve, in large part, to give the organisation a sustainable competitive advantage. A VRIO analysis demonstrates that Netflix possesses a raft of resources, in addition, capabilities that enable the organisation to exploit opportunities and neutralise threats in its external environment. In addition, several of Netflix's resources and capabilities have a varying degree of rarity. A value chain analysis of Netflix, on the other hand, shows that key design, production, as well as delivery stages of the organisation’s services are geared towards the generation of value for the end user.