Strategic Analysis of Netflix - Term Paper Example

? Term Paper Executive Summary This term paper will try to shed some light on strategic issues related to business operation of Netflix. In the first part, the study will describe briefly about the company and then in the second part the term paper will discuss the internal strength, weakness, opportunity and threat of Netflix. SWOT analysis will help the study to analyze strategic context of existing business model of Netflix. In the following part, the study will analyze industry environment for Netflix by using porter five force frameworks. In the last part, the term paper will analyze “Staying Power” of Netflix in terms of eight strategic verticals. Brief summary of discussion and conclusion will also be integrated in the term paper. Table of Contents Table of Contents 3 Introduction 4 Analysis 5 SWOT Analysis 5 Porter 5 Force Analysis 6 Staying Power 8 Summary & Conclusion 12 Works Cited 14 Name of the Student: Name of the Professor: Course Number: Date of the Paper: Strategic Analysis of Netflix Introduction The study has selected Netflix in order to analyze the given case study. In the first section the study will try to shed some light on business matrix of Netflix. Netflix- Company Overview Netflix is a renowned American organization, which specializes in renting and selling on-demand DVDs to customers through post. The company is headquartered at Los Gatos, California, USA. Netflix was established by Reed Hastings in the year 1997 (Netflix, “Company Facts”). The company has changed its business model quickly and shifted to renting DVDs to customers rather than selling DVDs. In 1999, Netflix had introduced a subscription based business model which is complemented with multi-tier distribution channel in order to increase their market penetration (Carroll, Menenberg and Kwok, “Strategic Report for Netflix, Inc”). Analysis SWOT Analysis Strength Weakness Netflix is the industry leader in online DVD rental market and market share of the company is more than 75%. Huge DVD inventory accompanied by 72 million discs of 0.1 million titles have given Netflix the strength to cater to multilevel demand of customers. Netflix uses subscription fee structure backed by multitier distribution channel in order to achieve high profit with the help of price discrimination. Growth opportunity for Netflix is dependent on Subscriber Acquisition Costs (SAC), churn rate and Average Revenue Per User (ARPU). Lack of switching cost has decreased ability of Netflix to control above mentioned three verticals. Opportunity Threat Netflix has already entered into digital distribution of video content in order to create a bridge between physical DVD formats and digital streaming. Netflix has already established strategic partnership with Microsoft in order to launch “Netflix compatible Xbox”; such product diversification strategy will definitely open new revenue earning paths for the company. Many customers prefer to watch movies on premium movie channels such as HBO, Showtime, Starz and Cinemax instead of renting movie from Netflix. HBO has launched HBO Go which is a video streaming service in order to increase competitive threat for Netflix (Thompson, “Netflix's Business Model and Strategy in Renting Movies and TV Episodes”). Porter 5 Force Analysis According to Michael Porter (1980, 1985) five force frameworks is a useful tool to understand competitive advantage associated with a particular industry. The study will use five force frameworks in order to understand competitive scenario for Netflix. Threat of New Entrant Attractiveness of the DVD renting industry has decreased for new entrants due to involvement of high cost related to acquisition of distribution rights from studios such as Time Warner, Sony Pictures and Universal Pictures. However, capital cost regarding setting up “brick and mortar” shop has decreased due to increase in online distribution of DVDs. Exit cost for the industry is dependent on capital investment done for establishing brick and mortar shop; for example, exit cost for an online DVD rental service like Netflix is low whereas exit cost for a Blockbuster which has done extensive investment on setting up brick and mortar retail format is high. Overall, threat of new entrant is low for the industry. Buyer Power Buyer power of the industry is high due to two reasons, 1- low switching cost due to the fact that customers can simultaneously subscribe to different service providers without spending huge amount of money and 2- availability of websites such as Torrentz by which clients can download movies without spending money. Overall, buyer power for the industry is slightly high. Supplier Power Companies such as Netflix use three types of models such as revenue sharing agreements, direct purchases and licensing agreements in order to collect video content from suppliers. Major suppliers for the industry are studio, distributors and networks. Traditional copyright law stipulator such as First Sale Doctrine, helps renting companies regarding redistribution of copy rights of video content; however, concept of copyright distribution cannot be applied for redistributing digital contents. Therefore, supplier power is high due to consolidated nature of supplier dynamics in the industry. Threat of Substitutes Availability of various viewing formats such as pay-per-view, online streaming and Video on Demand (VOD) has increased threat for DVD renting companies. It has been observed that customers subscribe to more than one rental services due to low switching cost and minute fluctuation in prices among close substitutes. Digital streaming has emerged as major threat and substitute for traditional physical DVDs, hence it can be said that threat of substitute is high in the industry. Internal Rivalry Lack of availability of competitors with similar nature of business has slightly decreased competitive rivalry in the industry. Although companies like Netflix, Blockbuster faces little or no direct competition due to lack of availability of competitors but these firms face challenges from distant rivals such as cable networks, VOD services, premium movie channels, websites like torrentz and Hulu, digital distributors etc. Hence it can be said that internal rivalry in the industry is moderate. Staying Power 1. Clear Vision It has been already mentioned that Netflix is the largest DVD renting company in the world. Vision and mission statement of the organization can be stated as, “our appeal and success are built on providing the most expansive selection of DVDs; an easy way to choose movies; and fast, free delivery” (Netflix, “Company Facts”). It is evident from the statement that the company has crafted a vision to provide quality movie experience to customers at affordable price. The company revamps its business objectives in a periodic manner according to the demand of the situation; for example, new goal of the Netflix is to achieve leadership position in online DVD rental market by increasing penetration in internet delivery channels for digital contents (Netflix, “Netflix revolutionizes the way people watch TV shows and movies”). 2. Environment for Employees Netflix’s CEO Reed Hastings focuses on hiring best talents and then giving them opportunity to take “smart” decisions in an independent manner. Employees in the organization are allowed to decide their compensation packages, there is no restriction regarding clothing policies and employees can select holidays according to their convenience. Employees are encouraged to share new ideas or innovative thinking in order to increase their overall morale. The company provides tangible benefits like gifts, rewards, travel allowance, entertainment and intangible benefits like recognition to employees in order to motivate them. Although functional structure of the company is centralized in nature because CEO of the company, Reed Hastings controls the operation of six departmental verticals of Netflix but the company uses anti-control strategy for employees in order to allow them to take decisions in the workplace independently. 3. Business Model Formulating subscription based business model was a corporate level move for Netflix. The company has designed eight subscription plans such as $8.99/month, $13.99/month, $16.99/month and five others in order to cater to the demand of various customers and generate higher revenue. The company also offers a “limited plan” for $4.99 to customers who are not willing to pay huge amount for DVD subscription. A cost benefit analysis for subscription based business model is given below. Plan wise Subscription Fee Cost of the Company Value for Company (Subscription Fee - Cost of the Company) $8.99 $0.54 $8.45 $13.99 $0.85 $13.14 $16.99 $1.03 $15.96 $4.99 $0.30 $4.69 (Source: Thompson, “Netflix's Business Model and Strategy in Renting Movies and TV Episodes”) Subscription based business model has helped Netflix not only to increase penetration in the DVD renting market but also has opened a gateway for the company to enter into the market of digital streaming of video content. 4. Stay Flexible Netflix responded quickly to changing dynamics of DVD rental industry. The company has understood the fact that demand for physical DVD is squeezing while digital streaming is picking up in the market. The company has taken initiatives to enter domain of digital streaming by investing $70 million in developing the digital streaming platform (Wells, “Reed Hastings Pushes The Envelope With Netflix”). Netflix has shown its flexibility in terms of product diversification strategy by establishing partnership with Microsoft for launching “Netflix compatible Xbox”, which has been seen by industry experts as revenue earning path for the Los Gatos based company. 5. Financial Performance The study will use consolidated financial statement of Netflix in order to understand its competitive advantage in terms of financial performance. Consolidated financial statement of the company is given below. (Source: Thompson, “Netflix's Business Model and Strategy in Renting Movies and TV Episodes”) It is evident from the above statement that revenue of the company is growing at constant rate for last five years, industry analysts have predicted following growth rate for the next few years. Year Revenue Growth Rate 2009 13% 2010 14% 2011 12.5% 2012 10.5% 2013 8.5% 2014 6.5% 2015 4.5% It is evident from the growth projection that there is opportunity for Netflix to utilize its financial revenue in diversifying its business in future. 6. Market and Sales Strategy Key product for Netflix is Blu-ray discs and DVDs of movies, TV serials, music albums, video games etc. The company has established partnership with Warner Bros in order to increase its depth of the product portfolio. The company uses subscription based business model in order to set different price point for DVD rental for customers. Netflix uses both below the line advertising and above the line advertising such as TV commercials, print advertisement and public relation activities to promote their service. Digital promotion of the company is backed by website banner, “pop-under” ads and viral marketing. Netflix uses the online sales channel in order to collect order from client, absence of brick and mortar retail channel has helped the company to reduce its marketing cost. 7. Board of Advisers Board structure of the company is complemented with six verticals, 1- marketing department headed by Leslie Kilgore, 2- talent department headed by Patty McCord, 3- service and DVD operation department, 4- financial department headed by Barry McCarthy, 5- product department headed by Nell Hunt and 6- content department headed by Ted Sarandos. These six advisors are supervised by Reed Hastings (CEO of the company). Huge experience and in-depth knowledge about the industry practices of advisors have helped the company to design profitable business strategy and achieve sustainable competitive advantage. 8. Consistent Quality It is evident from the SWOT analysis, that the company focuses on maintaining consistency in its offered service by using various techniques like customization in terms of DVD selection, decreasing lead time for service quality, offering Blue-ray or high definition DVD to customers, offering wide variety of latest movies and TV episodes to customers etc. Summary & Conclusion It is evident from the above analysis that Netflix needs to think beyond video rental industry in order to expand its business. In long term, Netflix needs to focus on implementing a fully digital streaming of content in order to tap the potential market for online streaming. The company has already invested capital in developing digital streaming facility, hence the next move for the company will be to increase the number of digital titles and generate awareness among customers about digital streaming facilities developed by Netflix. Works Cited Carroll, Hillary, Alex Menenberg, and Ian Kwok. “Strategic Report for Netflix, Inc.” Economics-Files.Pomona. Oasis Consulting, 20 April 2009. Web. 26 Feb. 2013. Netflix. “Company Facts.” Netflix. Netflix, Inc, 2013. Web. 26 Feb. 2013. Netflix. “Netflix revolutionizes the way people watch TV shows and movies.” Netflix. Netflix, Inc, 2013. Web. 26 Feb. 2013. Porter, Michael E. Competitive Advantage. New York: Free Press, 1985. Print. Porter, Michael E. Competitive Strategy. New York: Free Press, 1980. Print. Thompson, Arthur A. “Netflix's Business Model and Strategy in Renting Movies and TV Episodes.” Course Hero. Arthur A. Thompson, 2010, Web. 26 Feb. 2013. Wells, Jane. “Reed Hastings Pushes The Envelope With Netflix.” CNBC. CNBC LLC, 30 Jan 2009. Web. 26 Feb. 2013. Read More