Managing Strategy in Netflix - Case Study Example

Managing strategy report: Netflix BY YOU YOUR SCHOOL INFO HERE HERE TABLE OF CONTENTS Introduction and company background 2. Competitive strategy 3. External analysis 3.1 Five Forces 3.2 Industry life cycle 4. Internal analysis 5. Issues and challenges facing the company 6. Strategic growth options and evaluation of their relevancy 7. Description of selected strategy 8. Conclusion References Managing strategy: Netflix 1. Introduction and company background Founded in 1997, Netflix has evolved from its original business model as a mail-order DVD rental business that provides customers with blockbuster hits for their home entertainment needs. The premise of Netflix, founded by Marc Randolph, was to rescue customers from late fees that were common in such companies as Blockbuster. When Randolph, himself, was charged $40 for late fees on his own rentals, he was inspired to start a company that could offer low-cost rentals with promises that there would be no late fees for the service (Funding Universe 2011). By the early 2000s, Netflix was growing considerably with a great deal of consumer interest and loyalty being developed. As a result of this rapid success, Netflix began to create alliances with movie studies, such as Warner Home Video, that provided both partners opportunities for sharing revenues. As a result of these agreements, the company released its IPO for shareholders in 2002, as a company that could sustain growth and remain profitable long-term. With new capital availability as a result of having publicly traded stock, Netflix was now in a substantially sound financial business that provided opportunities to expand the business model. Today, Netflix provides customers with a flat rate membership of $7.99 USD per month, with the ability to rent DVDs and view streaming video content. Ease and convenience of using credit cards via Internet sales channels now gives Netflix immediate revenues that improves services and expand the vastness of its online movie libraries. This report explores the strategic position of Netflix, offering a full strategic appraisal of the company between the years 2010 and 2014. The investigation consists of analyses of the firm’s competitive strategy, performs an internal and external market analysis, determines the key strategic issues that have faced the company, strategic growth options for the company, and a description of the most relevant and viable strategies for improving the market performance of the firm long-term. 2. Competitive strategy Netflix operates in four key markets: DVD by mail, streaming video content subscriptions, original television programming, and video game rentals. The firm’s original market entry strategy for DVDs-through-mail was as a pioneer in this service concept in the United States, as a differentiator, giving the company a consumer-perceived uniqueness for providing convenience without having to visit a bricks-and-mortar rental company. Kalyanaram and Gurumurthy (2008) iterate the pioneers have tremendous advantages over late movers as the innovator becomes the model by which later entrants are judged, usually with unfavourable evaluations. The premise of this market entry strategy was that Netflix would be providing a disruptive innovation, where a new service can completely displace an established market (Christensen and Raynor 2003), in this case the DVD rental-through-store traditional model. Market entry for the firm’s other markets were accomplished through strategic alliances. This strategy involved partnerships with a major cable company, Comcast and Warner Home Video, that gave Netflix access to Comcast’s intellectual property and expertise that sought synergies that would provide Netflix with further differentiated corporate reputation (Rogowsky 2014; Funding Universe 2011). A differentiation strategy was most viable for Netflix as the pay-for-subscription online video and gaming market was highly saturated. Through alliances, the company gained access to new distribution channels and incurred much less costs for accessing original programming and streaming videos. Royalties and other licensing agreements require significant expenditures for an independent firm, hence Netflix’s alliance market strategy allowed the company to continue providing low-cost subscriptions without having to offset licensing costs by raising prices to consumers. 3. External analysis The external market environment is fundamentally influential in how Netflix achieves competitive advantage and pursues growth opportunities. This section utilises Porter’s Five Forces Model and the Industry Life Cycle model to assess how Netflix’s business is impacted. 3.1 Five Forces The most significant threat to Netflix is threat of substitutes. When considering the video game rental market, there are many emerging software development companies throughout the world that are providing consumers with zero cost gaming applications that can be downloaded for play on mobile devices and computing hardware. These gaming technologies are supported through advertising revenues and sponsorships that allow free game play to be provided. There is tremendous growth in smartphone subscriptions and usership throughout the world, an industry expected to be worth $4.7 billion USD by 2017 (Tech Sci 2012). Consumers are utilising their mobile devices to play games in a growth environment to many independent software companies, which can potentially impact long-term revenue growth in the video game rental business model. There are limited threats of new market entrants for Netflix. Only companies with substantial capital resources, such as Wal-Mart, have the capability to absorb the tremendous costs of entering a market, due to the high costs of licensing agreements and the ability to purchase various intellectual property rights needed to provide television and movie programming. Through its powerful alliances with major partners, holding rights to utilise various intellectual properties of partners, the firm is insulated from new market entrants (Amit and Livnat 2006). The bargaining power of customers is very relevant to Netflix. Some markets are price-sensitive and Netflix must provide low-cost services to consumers in order to attain their loyalty to the company. With many different competitors in its key markets, offering free or low-cost gaming downloads, in-store rental service competitors, and such sites as Hulu that offer free or low-cost access to television and movie programming, the switching costs for consumers are very low if they perceive greater value with competition. Price increases on products can drive consumers to select a competitor offering comparable products. Supplier power is not largely relevant to Netflix as its alliances have brought the firm substantial volumes of intellectual property-protected video and television content with little reliance on a supplier network. Competitive rivalry is very relevant to Netflix. Emerging competition, such as Hulu and Wal-Mart are very adept in the marketing function and have the expertise and capital resources to build powerful, well-recognised brands with competitive pricing structures that make these businesses valuable to consumers. Competition utilises many different pricing strategies which is heavily promoted through advertising, including high-low pricing, freemium strategies (Makuch 2013), and penetration pricing (Kotler and Armstrong 2010). Wal-Mart and Blockbuster, two major competitors, began an effort to replicate the firm’s business model, offering DVD rentals through mail. In today’s saturated competitive markets, it is becoming more simplistic for high-capital businesses to replicate competing strategies and models (Nandan 2005). Hence, Netflix must be considerate of pricing structures, brand management and promotion in order to maintain its differentiated competitive reputation to satisfy customers and retain loyal consumers. 3.2 Industry life cycle Online streaming video, video game rentals, and television programming access markets are in a stage of growth for companies offering these services. Figure 1 illustrates a generalised model of a firm’s life cycle showing that growth can continue to be achieved by the creation of new strategic initiatives (such as creating services extensions or potential acquisitions) as well as what can occur when a firm’s position is no longer sustainable and moves toward failure. Figure 1: A general movie rental life cycle model Source: Strategy Dynamics. (2014). A strategy life cycle: Blockbuster. [online] Available at: http://www.strategydynamics.com/info/blockbusters-strategy.aspx (accessed 18 November 2014). Fortunately, Netflix has managed to sustain growth through extension of its products and services. In 2013, Netflix began distributing original programming such as programs like House of Cards and became instrumental in creating continuations for programming that had previously been cancelled on major networks, such as Arrested Development (Andreeva 2013). Hundreds of exclusive programs and television movies have avoided reaching the maturity stage as the company continuously innovates exclusive content in partnership with major movie production studios and television studios that are only available through Netflix. The U.S. market is characterised by an environment where movie houses are offering substantial increases on ticket prices which is driving consumers toward the online rental environment (PR Web 2012). Price-sensitive consumers and the availability of mobile devices such as smartphones, iPods and the like are strongly popularising online subscriptions to programs and movies. By November 2014, the market for tangible video game and movie rentals declined by 14.3 percent (IBS World 2014). Hence, by expanding services and products online and developing alliances to ensure production of original programming, Netflix defies market trends and experiences growth in an environment with considerable demand opportunities. The greatest threat to the business is growth in consumers using low-cost kiosks and vending systems (such as Redbox) that allow for rentals as low as $1 USD. These competing self-service rental systems are commonplace in major commercial retailers, allowing convenience and very low prices for consumers. Hence, all market factors considered, the company’s critical success factors are: Effective brand management as a competitive rivalry advantage Innovation of services Maintaining limited liability pertaining to licensing and other intellectual property law compliances. Keeping a low price. A recent 60 percent increase in price caused considerable subscription declines and consumer backlash. Maintaining service and product extensions to sustain a growth position long-term. 4. Internal analysis By 2014, Netflix maintained considerable internal competencies that provided the business with continued growth. The company boasted over 2,000 employees that handled information technology support, physical packaging and distribution of online rentals, and superior customer service (Netflix 2013). These employees are required to ensure that all aspects of the value chain are supported effectively to retain customers, as Netflix acknowledges that competitors with strong brand recognition, high capital, and substantial marketing competencies can erode market share (Netflix 2013). Figure 2: Value Chain Model Source: Word Press. (2014). Is the anti-Jueteng campaign an effective use of public funds? [online] Available at: http://sanamagan.wordpress.com/page/16/ (accessed 17 November 2014). Of the most significant importance is information technology support. In 2013, Netflix devoted $70 million USD to technology development initiatives with a 35 percent increase in employee labour expenditures to continue improving streaming content and to expand into new international markets via an Internet-based model (Netflix 2013). This continues to improve service delivery and differentiate the business in terms of end-user web usage. Netflix also utilises competent marketing strategies, including a 30-day trial membership to lure consumers to the business model (Netflix 2013). The company is an active user of social media to promote the brand, which requires support staff to manage real-time communications and information exchanges with consumers. There is explosive growth in the U.S. trending toward consumers’ regularly using social media to gain information about corporate activities and sales promotions. Therefore, marketing and operations are inter-linked at Netflix which requires talent expertise to sustain a positive brand identity for the firm and gain consumer loyalty. The company, furthermore, operates under a centralised business structure that enhances control. Marketing, operations, finance, new product development, and talent (HR) activities are controlled directly through a reporting system where managers of these business units report directly to the CEO (Krengel, et al. 2010). Rather than having a horizontal structure, which would place more coordination and allocation of resources in the hands of line management and employees, Netflix ensures superior controls that provides the business with the ability to more effectively manage job role activities and tangible resources through the knowledge held by experienced management. This ensures greater compliance to employee behaviour expectations and performance objectives. The organisational culture standard is high productivity at Netflix and performance is rewarded with large salaries for managers (Siegler 2009). The company also rewards employees, thus motivating performance outcomes, when high productivity is managed and when employees exhibit behavioural patterns related to its corporate values: courage, passion, selflessness, honest and innovation (Krengel, et al.). Hence, this management-by-objectives ideology ensures superior dedication along the value chain and brings the business superior business outcomes as a result of human capital. Along the VRIN model, the company experiences competitive advantage (or fails to achieve) through the following: Value – removing weaknesses associated with a participative, horizontal model that ensures compliance to performance guidelines. Rarity – Netflix recently developed an application for Android devices that allow for streaming content to be played on mobile devices rather than relying on the Internet solely for digital content. Imitability – Broken or defective DVDs can be reported immediately through online channels or telephone customer service and the model supports an immediate business response for replacement (Muzumdar 2014). Non-substitutability – This is a weakness at Netflix. Other companies can emulate the response service system for defective products with only moderate adjustments to their service systems and logistics. Through management level competency and employee dedication, the company sustains its critical success factors. Considerable financial and labour investment in the marketing function is supported by strong brand leadership. With a key value of the culture being innovation, the firm is able to collaborate with all internal human capital to provide unique ideas to improve service and how to extend the service line. Better management controls that ensure proper resource allocation allow for the service’s pricing structures to remain low and attractive by avoiding issues of waste and excess overhead. 5. Issues and challenges facing the company The most significant problem for Netflix is in product development, due to the high costs of producing original programming and obtaining appropriate licensing for distribution of copyrighted content. Competitors are becoming adept at the online content delivery model and also establishing alliances with production studios, movie and television companies to provide comparable video content; as well as using effective marketing to achieve building consumer interest. There is a risk, as in traditional television programming, that original shows and series continuations will not be embraced long-term by a captive consumer audience. This could lead to significant financial losses to the firm. The high costs of production, licensing and distribution for exclusive content could create operational losses in the event these hundreds of shows, movies and series are unsuccessful with consumer demographics. If competition is more successful in marketing its own exclusive content (achieved through similar alliances), it can negatively impact business success. Therefore, maintaining innovation and using appropriate and effective marketing to promote this content is a critical strategic concern. 6. Strategic growth options and evaluation of their relevancy To achieve growth, diversification is critical. Netflix is already a mass market-focused business, hence market penetration is not appropriate for growth as the service is already attractive to mass consumer demographics. The company cannot achieve growth through market development as existing products and services maintain a shortened life cycle without innovation and improvement. Based on Netflix’s position, the company maintains two specific strategic options. Netflix maintains $5.4 billion USD in assets and boasted a net income of $112 million in 2013 (Netflix 2013). Moody’s further improved the credit rating of Netflix as a result of 12 months of strong performance in 2013 (Street Insider 2014). There are many up-and-coming software developers around the world with the knowledge and know-how to create unique gaming software and Netflix has the capital and credit worthiness to exploit such a partnership. Recently, Microsoft acquired the popular Minecraft game manufacturer, Mojang, to diversify its product portfolio expecting a significant revenue growth opportunity through this strategy. Netflix can partner with development companies to create Netflix-exclusive video games available to consumers with their subscription. The video game market internationally has experienced a steady 11 percent growth rate since 2013 (Digi World 2014). Production and significant media promotion of a Netflix gaming innovation could diversify the business in terms of capturing new market interest and building a more trusted brand reputation. Netflix can also diversify by entering new markets in service categories not currently associated with its business model. The firm can launch new online payment service companies (such as Paypal) or loan companies that service completely different markets. Tesco, a UK-based supermarket chain, began offering financial services and found revenue growth by using its strong brand to build consumer trust and interest in utilising these services. Evaluation of strategic options Strategic evaluation is ranked according to the suitability, acceptability and feasibility of the firm’s strategic options: 1. With a good credit rating and available financial resources, diversifying through exclusive, self-owned gaming software programs and entering the financial services market is acceptable, feasible and suitable for sustaining growth. The company further maintains ample experience operating within an alliance environment which will enhance competencies and collaborative relationship management to achieve a new, exclusive Netflix gaming software. Many independent games, such as the explosively-popular Candy Crush Saga in the U.S. justifies why this diversification strategy is feasible and acceptable within a business model that sustains existing distribution systems and technology to ensure low-costs for providing the gaming technology to consumers. 2. Netflix’s strong brand positioning and recognition – Expansion into the financial services market is supported by strong credit worthiness, capital availability, and the knowledge to benchmark success of such companies as Tesco that found success in this venture. However, Netflix has no internal management competency and experience in running such a new company which would require a recruitment strategy to gain top talent with ample years of financial services management experience. The company, in its current position, does not understand how to market to a very different demographic with unique needs and motivations for pursuing loans or other financial services. This might require consultation with external professionals or consultants in this industry to assist in providing Netflix with knowledge about the value chain components necessary to build demand. Based on the complications with entering the financial services market, the most viable choice for Netflix is pursuit of strategic alliances for exclusive game software developments. It might require substantial loans and other investments into HR management, marketing, and industry benchmarking to achieve a positive identity in a saturated marketplace dominated by major financial services firms. Many of these firms have very long-standing brand reputations (such as Wells Fargo, AIG, and Hancock Investments; to name only a few). It would require a complete, ground-up business model to be developed to support financial services which could cost over a billion USD that might not be recovered for many years 7. Description of selected strategy Netflix maintains existing technology infrastructure to ensure adequate distribution of new Netflix-exclusive gaming software programs, an established subscription structure, and talent capacity for marketing digital content and providing logistical and service-based support. This means that no significant expenditures would be required for allying with software developers contracted to create unique games owned by Netflix. The existing operational model is already established to support such a diversification strategy. It would also open new international market opportunities for gaming aficionados that demand unique and innovative video game content. In reference to Minecraft, a game available to consumers online for a price of £19.99, achieved revenue success of $326 million in 2013 (Stuart and Hern 2014) through effective marketing and innovative game play content. By marketing the product to a different group of target segments, it could very well attract much higher demand for membership to the firm by those who value creative gaming software. Having the game supported for interactive, multi-player opportunities also improves a sense of social belonging which is recognised by marketing theory as being significant criteria that builds attachment and loyalty to a brand (Zhang and Chan 2009). With diversification being a key success strategy in a market where growth is achieved through innovation, and with ample human, structural and economic support internally, the firm can improve its long-term brand reputation and guarantee more subscriptions by focusing integrated marketing communications toward gaming enthusiasts of all ages. With proper low-cost PR strategies and moderate expenditure in advertising to promote the game both pre-launch (during development) and hyping its impeding market launch, subscribership volumes will likely increase as interested consumers want to experience this unique gaming technology. The $326 million revenue success of Minecraft (largely through digital distribution) justifies that a well-coordinated effort can sustain an effective diversification strategy, capture new markets worldwide, and provide superior revenue growth for the firm in an environment becoming more and more saturated with competition year upon year. 8. Conclusion Innovation, brand management competency, low price and service extensions were identified as key success factors for Netflix. Through diversification achieved by alliances with software gaming developers, Netflix satisfies all of these criteria. Subscription rates will not change and the gaming technology will not be offered independent of this. It will illustrate a pioneering attitude with Netflix for those consumer segments that demand this from a firm and, through creative and relevant marketing strategies, build a more solid brand identity domestically and internationally. An industry with an 11 percent growth rate is substantial and justifies the decision to seek self-owned video game development as a relevant strategy to effectively diversify the business. With many markets being price-sensitive, Netflix requires a growth strategy that does not inject considerable operational costs to create a whole new business model. This is why the recommended strategy is acceptable, feasible and suitable for growth in a market environment with proven and sustainable growth rates and that can be supported using existing infrastructure capacity and capability. 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