Managing Strategy: Netflix - Case Study Example

Managing Strategy: Netflix Contents Introduction 3 Company Background 3 External Analysis 4 Porter’s five forces 4 PESTLE 4 SWOT 5 Internal Analysis 6 Value Chain 6 Competency framework 8 Key Success Factors 8 Issues and Challenges 8 Commendable growth strategies 9 Evaluation of growth strategies 10 Description of selected strategy 12 Conclusion 12 Reference List 14 Introduction Every company has an objective of maintaining sustainable growth in the long-run. Strategic appraisal can be described as the process by which the company can align its resources to achieve the long-term objectives of sustainable growth (Dess, Lumpkin and Eisner, 2006). It is important for companies to allocate its resources in the most optimal manner that can achieve the best possible results. Strategic appraisal helps in achieving this objective. The purpose of this paper is to conduct a strategic appraisal process for Netflix. In order to achieve this goal, the external and internal environment of the business will be studied to highlight the issues and challenges that are faced by Netflix. This will be followed by a section highlighting the possible measures that can be taken by the Netflix authority to pursue future growth. Finally, the actual strategy of growth that can be pursued by the company has been described. Company Background Netflix Inc. is an American based company engaged in renting movies to customers. The company was incorporated in 1997 and had begun to rent movies from 1999 (Netflix Inc., 2014). Essentially the company belongs to the Internet television network as it provides television shows and movies via internet. The company provides this service to a number of other countries operating both in the U.S. continental and outside it. The company operates in more than 40 countries. At present the company has three sets of business portfolio namely streaming of domestic movies, streaming of international movies and provision of domestic DVDs. Statistics show that the current customer base of the company is close to 48 million (Netflix Inc., 2015). The company had launched its streaming service back in 2007 which had allowed the company to provide services to its customers by providing them movies on their computer, television and mobile phones. The company mainly depends on its business of streaming subscription in order to generate revenues. The net income of the company peaked in 2011 reaching a value of 226.13 million dollars (Netflix Inc., 2014). However, in 2012 it fell to 112.4 million dollars. The earnings per share of the company had fallen from 4.28 in 2011 to 1.93 in 2013 implying that the investors are losing confidence on the company. Netflix provides employment opportunity to 2,022 people (Netflix Inc., 2014). External Analysis This section of the paper uses Porter’s five forces model and PESTLE analysis in order to examine the overall external environment of the company. Porter’s five forces Competition among existing firms: The existing competition between the firms is very high. It has been found that there are four different categories of firms that provides this service namely physical stores renting DVD’s, mail delivery firms providing this service, kiosks providing DVDs on rents and videos on demand (Thompson, 2007.). Threat of new entrants: The requirement of high cost of the capital makes it difficult for new player to enter this sector. The existing players in the markets have high economies of scale making it easier for them to drive new competitors out of the market. Threat from buyers: The buyers of Netflix are highly price sensitive making the bargaining power very high. It has also been found that the loyalty of the buyers has declined over time which in turn has enhanced their bargaining power (Thompson, 2007). Threat from suppliers: Suppliers of Netflix are film industry, delivery services and transaction processing services. Suppliers in the entertainment business have the ability to increase the prices of the products or reduce the quality of the services provided. Hence it is evident that the bargaining power of the suppliers is quite high. Threat from substitutes: The threat from substitutes is also quite high. There are a number of substitute products for online rental process like watching television and surfing internet. These activities provide high source of competition to Netflix. The external environment of a firm can also be understood with the help of PESTLE analysis which helps in determining the political, economic, social, technological, legal and environmental forces affecting the business. PESTLE Political: Netflix operates in a number of countries which makes it mandatory for the organization to follow a number of regulations in different countries. For instance, the U.S. government is keen on promoting the net neutrality and abandon the Netflix tax which might impact the business in a negative manner. Conflict between the government agencies and regulatory authority over the content of digital media may be particularly harmful for Netflix. Economic: There are predominantly three major variables that can affect the business strategies of Netflix namely interest rates, rate of tax and disposable income of the consumers. The economy of the U.S. is slowly recovering after the crisis and in 2014 it is expected that consumer spending will be $113 billion (Thompson, 2007). The issue of taxing digital content is also quite challenging as different states have different measures. Social: The cable and the internet network industry in the U.S. are undergoing rapid changes on account of changing tastes of the consumers. It has been found that consumers are watching more movies and television shows as the number of options available to them are constantly expanding. Streaming movies on television connected to internet is the latest trend which is attracting consumers. Technological: Technological advances are extremely important in the digital media as latest developments pose threats of new substitutes for the existing companies. Internet streaming is often identified as the future of the entertainment industry. Netflix has however managed to maintain its position in the market of internet streaming by devising prudent strategies. Legal: Laws like network neutrality and Video piracy protection act are the main ones which guide the entertainment industry (Healy, 2010). These laws impose certain restrictions on companies like Netflix and affect their profitability. Environmental: Online streaming has been able to minimize the impact of greenhouse gas emissions as it eliminates the need of driving to the store physically. It can be said that the environmental impact of Netflix is quite low. SWOT Strengths The introduction of instant streaming at earliest. Strong brand image of the company. Largest streaming library and creation of original content. Adapting of technological innovation. Weakness The decision to separate the DVD business from online streaming has tarnished the image. Competitors like Hulu can provide movies faster than Netflix. Weakening financial position of the company. Threats Emergence of new competitors like Apple and Amazon. Government regulations on net neutrality. Fall in stock price of the company. Opportunities Has a huge potential of expanding its product base. Expansion of the company in the external market. New avenues like online gaming and sports. Internal Analysis Two models has been utilized for conducting the internal analysis of Netflix namely Competency Framework and Value Chain model. Value Chain Firm Infrastructure Netflix has a robust infrastructure at present with strong financial background. Since its incorporation in 1997, it has followed a subscription-based model in order to generate maximum revenues (Artero, 2010). Netflix has also constantly been quick in upgrading itself to new technological developments. Human Resources The company treats its employees as major assets and the core team is extremely productive in offering new ideas. The team members are driven by the commitment towards providing best service to enhance customer satisfaction. Technological Development Netflix has been constantly innovating itself like developing new proprietary software to make it easier for customers to preview movies. Recently, the company has also made advancements in letting customers choose the appropriateness of movies and its length (Thompson, 2007). The feature of recommendation has also been quite useful for customers. Procurement Netflix mainly procures its movies from Warner Bros which allows customers to access more than 10000 streaming sites (Netflix Inc., 2014). Netflix has also partnered with various independent studios to enrich its library. Inbound logistics: Netflix has been able to establish a robust network of inbound logistics by partnering with Warner Bros. The company has used a standardized system of delivery that helped in the reduction of the logistics costs. Outbound Logistics: In order to improve the level of the inventory of the warehouse to satisfy consumer demand, Netflix ensures it has fully stocked inventory. It has established new partnerships to strengthen its library. Operations: Netflix has to manage three different sets of operations like managing the distribution in factories, stocking the inventory and providing timely delivery. It has managed all three functions effectively. Services: Service of Netflix is quite satisfactory which had allowed the company to build a strong brand image among peers. Marketing and Sales: The Company has a successful business model and has invested a sufficient amount of money for improving its advertising and sales. Special attention has been provided to improve the instance of advertising in Canada and Latin America to acquire higher customers. Competency framework Netflix has both threshold competencies and core competencies. Threshold competency helps in meeting the exact minimum expectations of the customers and unique competency refers to the type of capabilities which provides a company to keep itself in front of its competitors. The ownership of a large number of movie and television shows and the infrastructure to provide them to the clients serves as the threshold competency for Netflix. The fact that Netflix encompasses a strong distribution network, it has allowed them to creating a wider customer base (Thompson, 2007). The award winning website of the company coupled with the sophisticated algorithm for recommendation has been able to enhance the extent of customer satisfaction. These two key strengths have proved to be extremely beneficial for Netflix. Key Success Factors There are three major factors that have contributed to the robust growth of Netflix in the long-run. The first one is the timely adaptation of technology which has not only allowed Netflix to create a vast pool of loyal customers but also helped the company in the reduction of the operational costs. The system of mail delivery of Netflix is quite efficient and covers a huge geographical location allowing the company to provide timely service (Abraham, 2013). The development of internet television by the company is expected to become the future strategy for growth. Finally, the marketing campaigns of Netflix have also been successful in creating the strong image of the company. Issues and Challenges The issues of Netflix have surfaced only recently. It has been found that the recent business decision that has been taken by the company has been particularly harmful for the reputation. The company had decided to charge a higher price for its services which had heavily enraged its loyal customers. This in turn has been creating a negative image of the company in the market for which the stock price began to plummet. The decision to separate the business of online streaming from that of the internet streaming was also erroneous as customers began to look for other options (Thompson, 2007). The problems of Netflix have been intensified with the rising number of competitors in the market who had offered their products at a relatively lower price. The advancement of technology has proved particularly harmful for the company. For instance, rise of satellite providers like Dish Network and fibre-optics provider had increased made it easier for customers to watch movies (Allen, Feils and Disbrow, 2013). Similarly, growth of “video-on-demand concept had also raised the extent of completion. Introduction of innovative technology like the streaming of movies through television sets enabled with internet streaming facility had also revolutionized the entertainment industry. It was in this particular phase that some of the major competitors like Hulu plus had emerged and that acted as a major threat to Netflix (Allen, Feils and Disbrow, 2013). The concept of watching television anywhere through internet had also become popular in this period. Competitors of Netflix like Redbox provided steep competition in terms of renting physical discs to the customers. Though Netflix had remained a clear leader in internet streaming in 2012, it was plagued by the growth of Hulu Plus and Amazon Prime instant video. These factors had cumulatively caused a huge threat to the market position of Netflix. Commendable growth strategies It is quite clear from the present condition of Netflix that the company must consider to take a few rapid steps in order to sustain its position in the market. Ansoff matrix can be used as an analytical tool to frame the strategies that can be used by the company to develop its new product or market growth strategy. The matrix states that there are four options for a company namely extension of existing products in current market, existing products in new market, developing new products into existing markets and expanding into new markets with new products (Hitt, Ireland and Hoskisson, 2012). The case of Netflix reveals that the company has been using three of the above four strategies in order to enhance its growth. The company has already started to develop new products in the existing markets. Netflix has entered into new partnerships with suppliers in order to provide new offerings for its customers. The company has also come up with new selection software that is supposed to make the system of streaming videos much easier. Strategic partnerships with new video providers were established in order to provide maximum types of services for its customers. The company had also been aggressively seeking geographical expansion into new markets with its existing products. The company’s aggressive expansion in Latin America and Canada was an attempt to take the opportunities that were available in the foreign market. Netflix also had to face certain challenges when it had entered into Latin America as the concept of on-demand streaming was not very popular in these country. Netflix has also been trying to for penetrating in the existing market. The company had taken up aggressive advertising campaigns in the home country in order to increase the existing market share. The marketing expenditure of Netflix was inflated from $25 million in 2000 to $298 million in 2012. The aim was to improve the domestic market share. Evaluation of growth strategies It has been observed that presently Netflix has three options to choose from. Strategy 1 Strategy 2 Strategy 3 Suitability The first strategy is improving the current market share through enhanced advertisement and marketing expenditure. Though this strategy can be expected to improve the market share of the existing products, it is unlikely that the company will be able to achieve desired results through this approach as existing competitors are providing similar services. The second plausible strategy that can be followed by the company is to develop new products in the existing markets. This can be achieved by developing new online gaming services or by introducing new sports streaming (Diallo, 2013). This strategy could be suitable in solving the current crisis of the company by adding new customers. The final strategy that can be followed by Netflix is to consider strategic expansion into new markets or develop new markets for its products. However, if present statistics indicate that the expansion of the company in Latin America and Canada has been met with unique challenges. The combined loss of the company in these markets has been estimated to be around $103.1 million. Acceptability This strategy will be acceptable as the company has enough financial strength to funds its operations. The company had experienced a consistent rise in the level of its overall revenues in the past five years from 1.67 billion dollars in 2009 to 4.37 billion dollars in 2013. This strategy will also be acceptable as the existing financial strength of the company can back up the required investment. The existing research and development of the company is also up to the mark to implement these changes. This strategy will also be acceptable both in terms of financial and technological strength of the company. Feasibility This strategy is feasible as the return on investment can be easily measured by the extent to advertising is to sales ratio of the firm is robust. This strategy is feasible based on the current market scenario of Netflix. The company has already been able to create a range of loyal customers and developing new products is likely to attract more customers provided that Netflix has already created a strong brand name for itself. This strategy may not be particularly feasible for the company at present. The primary reason behind this is that the company is currently facing some difficulties with its liquidity position in maintaining its current expansion. The analysis of these three strategies shows that it will be most convenient for Netflix to follow product development strategy in its existing market. This approach can be ranked as one. The option of international expansion could have been a lucrative strategy but the current problems faced by the company in Latin America and Canada shows that it might face challenges in other markets as well. It is for this particular reason this strategy is ranked second. The strategy of market penetration is ranked third because the existing market is quite saturated and it is unlikely that additional advertisement campaigns can generate significant gain in market share. Description of selected strategy It is recommended that Netflix must follow a product development strategy in order to sustain growth. It has already been pointed that the present subscription strategy of the company is being highly debated. This indicates that it will be highly commendable for the company to diversify its current product line. It has been observed that online streaming is the most suitable strategy for watching movies in the current times and Netflix is the present market leader. However, the pricing strategy had brought problems for the company. The company can use its existing resources and capabilities like its distribution channels and innovative technology to create new online games that will be acceptable to the consumers. Netflix has already been able to create a successful DVD rental and online streaming business so it would not be difficult for the company to venture into new avenues of gaming. Netflix can also consider venturing into online streaming of sports. None of the current streaming video services provides the option of watching live sports on account of the large licensing payment. However, Netflix has the financial strength in order to pull this strategy, as it was the first company to have ventured into online streaming of movies. In this way, it can also gain a first mover advantage. The subscription to internet television is increasing consistently and entering into live sports streaming, which can be feasible for Netflix. Conclusion Netflix has been able to establish itself as the strongest player in the U.S.A. market based on its prudent understanding of market and framing strategies accordingly. Netflix is currently in troubled water with its high priced subscription fees and separation of the fees structure. It is for this particular reason that the company should look out for options in order to sustain its current growth. From the analysis of external forces it can be suggested that technological improvement is going to present a series of opportunity for Netflix. The increasing bargaining power of the consumers and the government regulations can however pose a number of challenges for Netflix. At this juncture, Netflix can follow the strategy of product line expansion. The other two possible strategies for the company would be to follow international expansion or market penetration. However, the different government regulation in different countries may make it difficult for the company to pursue international expansion. At the same time, the liquidity position of Netflix will make it difficult to pursue international expansion. Netflix can consider introducing live sports streaming and video game streaming to provide new products to customers. Reference List Abraham, S., 2013. Will business model innovation replace strategic analysis? Strategy & Leadership, 41(2), pp.31-38. 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. Diallo, A., 2013. Ready to cut the cable tv cord? Heres how to do it. [online] Available at: [Accessed 14 January 2014]. Healy, C., 2010. Netflix in an academic library: a personal case study. Library Trends, 58(3), pp.402-411. Hitt, M., Ireland, R. D. and Hoskisson, R., 2012. Strategic management cases: competitiveness and globalization. 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