Strategy Management of Netflix - Essay Example

Strategy Management of Netflix Table of Contents Introduction 3 External Analysis 3 PESTLE analysis 3 Porter’s Five Forces 5 Critical Success Factors6 Threats for Netflix 6 Opportunities for Netflix 7 Internal Analysis 8 Competency Framework 8 VRIN Framework 9 Value Chain of Netflix 10 Critical Success factors 11 Issues and Challenges faced by Netflix 11 Generation of strategic growth options 12 Ansoff Matrix 12 Evaluation of strategic growth options 13 SAF framework 13 Description of Selected Strategy 13 Conclusion 14 Reference list 15 Introduction Netflix is the leading internet television company that offers streaming services of movies and TV shows in 77 countries (Netflix, 2015a). The streaming services of Netflix are available on televisions, personal computers and smartphones and other mobile devices. The companyoperates in three major segments, DVD rental, domestic streaming and international streaming. The DVD rental services operate though mail delivery and generate revenue from customer subscription. The streaming services also generate its revenue through the monthly subscription system. As of fiscal year 2013 the company made revenue of $4.37 billion, which is a 21.2% increase over the previous year. The company’s maximum revenue is earned from the domestic streaming services, which accounts for $2.75 billion of revenue generation. Netflix is dominant in the American market, which generates almost 84% of its revenue (Marketline, 2014). This paper discusses the external and internal environment of Netflix, using theoretical models like PESTLE framework, porter’s five forces, VRIN framework, Value chain model etc. This is followed by the discussion of the challenges faced by Netflix along with the vantage point which the company has leveraged. The paper further discusses about the company’s strategic growth options which have been justified in the light of relevant facts and theories. Finally the paper will conclude with the summary of the major findings from the study, followed by recommendation on the chosen strategic decisions. External Analysis The external analysis of Netflix is assessed by the following theoretical models. PESTLE analysis Political influence: Netflix operates in the movie streaming and DVD rental business, which is rarely affected by the political scenario of a region. However, the political framework can impose certain regulations and ban particular movies with controversial content. Movies with political storyline often bring controversies and are eventually banned in several countries, which affect the business of Netflix. Economic influence: The economic condition of a region highly influences the business operation of a firm. The movie steaming and rental business is highly dependent on the disposable income of the consumers. Moreover, movies are considered to be leisure products and a customer will spend on watching movies only when his disposable income is in and above satisfactory level. The economic crisis of 2012 has impacted the sales of Netflix significantly as it has reduced the number of viewership and subscriptions (Li, 2013). Moreover, the economic crisis has also led to lower number of film productions. In order to increase its profitability, the company decided to raise the price of the subscription plans, which severely affected the customer base of the company. Social: The growing trend of internet and smartphones has allowed the company to gain a large number of subscribers for its streaming services. The hectic lifestyle of the urban population makes it difficult for them to visit theatres to catch their favorite movie, thus Netflix allows their customers to stream movie at their place and time convenience. According to the reports of Los Angeles Times (2012) the movie consumption over internet streaming is growing at a rapid pace and this trend is likely to work in favour of Netflix’s future growth and sustainability of business. Technological: The technological development and its availability to the consumers have allowed Netflix to launch mobile applications for smartphones and tablets. Moreover the development of faster broadband services and wireless connectivity like 4G or LTE has enabled the consumers to watch movies on the go in high definition. Thus the technological advancement of a region largely influences the business of Netflix as a major part of its operations is dependent on the availability of high speed internet services. Legal: The legal framework of a particular region is a major determinant of the success of Netflix. Online movie streaming and rental services faces threat from illegal torrent downloads. Thus strong law enforcement against torrent downloads will help Netflix to thrive in its business. Environmental: The movie streaming industry is completely based on the internet and does not have any physical presence, so the influence of environment is almost negligible in the online streaming business. However, the DVD rental business is dependent on mail delivery system and poor weather conditions can lead to delay in delivery. Porter’s Five Forces The Porter’s five forces analyse the level of competitiveness in an industry based on five parameters. Buyers’ Power: The online movie streaming industry is characterized by the presence of several companies like Hulu, HBO Go, Amazon Prime, Comcast, etc. The presence of a fairly large number of companies reduces the switching cost for the consumers, thereby increasing their bargaining power. Since the products offered are highly standardized, the existing players differentiate themselves by creating value for money and they often go for competitive pricing (Donfro, J., 2014). As a result, the budget conscious consumers get attracted towards the lower price offering, even if the price difference is very small. Thus the overall power of buyer is high. Supplier’s Power: The suppliers of the movie and TV show streaming companies are the production companies. These production companies hold high influence on the streaming and rental companies as the rental companies are highly dependent on the license contracts given by the production companies. Moreover, owing to the financial strength of the production companies, they often dictate the prices of the contracts, which often results in loss for the companies. In the year 2013, Netflix had to discontinue certain popular shows of MTV and Nickelodeon, because the license with Viacom had expired; after which the contract was handed over to Amazon (Pepitone, 2013). This suggests that the overall power of the suppliers is high. Threat of New Entrant: Entering into the movie streaming and rental business requires huge capital investment in getting license contracts, launching promotional activities and establishment of good relationship with the suppliers. These factors create a high barrier to entry for the new entrants. Moreover, the presence of well established brands in the industry like Netflix, Hulu, Amazon, etc. makes it even harder for a new entrant to build up its brand image and gain consumer preference. Thus the overall threat of new entrants is assessed to be low. Threat of Substitutes: The direct substitute of online streaming or DVD rental services is watching movies on television, or attending the theatres. Moreover, the illegal torrent downloads also acts as a major substitute for online streaming or movie rental services. However, the on-demand instant streaming of desired video content cannot be offered by television or theatres. The consumers can easily watch their favorite movies or TV shows at their own place and time convenience. Thus the overall threat of substitute is moderate. Rivalry among firms: The movie rental and streaming industry consists of a lot of well-established players, which increases the level of rivalry. The companies often try to differentiate itself by offering unique services by giving package deals at lower monthly subscription rates. Competitive pricing is commonly seen in this industry. Moreover, the product offering is similar in all the existing firms, thus any value addition if made, must be offered by lower price offering. Thus the overall rivalry among existing firms has been assessed to be low. Critical Success Factors Netflix holds the leading position in the movie streaming and rental industry which as a result creates a strong brand image and consumer preference. The overseas presence of the company also acts a major factor in building up the reputation of Netflix and increasing its customer base. The growing social trend in consumption of video content over online streaming acts as a major success factor for Netflix. Moreover, the rapid growth of internet usage has enabled the company to generate its maximum revenue from the streaming services. The technological advancement has allowed Netflix to launch its own mobile applications for smartphones which allows users to stream anywhere they want. Moreover, the development of high speed internet is also a major determinant of the company’s success. The company faces very low threat from the new entrants, which allows it to focus only on the existing rival companies. Multiple strategic partnerships with leading production studios. Threats for Netflix The growing demand of online content will eventually make the DVD rental service extinct, and will leave the company dependent on only one business segment. Moreover the rate of postal services in the US has increased substantially over the years, which has decreased the profitability of the DVD rental services and is like to continue in the near future. The price increase and the subsequent splitting of the rental and streaming services have created a lot of disappointed customers, thereby reducing its customer subscriptions and revenue generation. This downturn was heavily reflected on the company’s stock prices. The growing number of torrent users all over the world poses as a severe threat to the company. The increase in online frauds often scares customers which affect the growth rate. According to the reports of Sprangler (2015), there are large numbers of consumers in China and other territories who use illegal VPN to access Netflix services. Moreover the growing fraud over the internet has compelled Netflix to invest in better online security to protect its customers. Opportunities for Netflix According to the reports of Marketline (2014) the total number of online viewers who watch video content by streaming has increased by 34% in 2013. This suggests that there is a growing trend among the consumers towards the online streaming. As a result this acts as a potential opportunity of Netflix to develop its streaming business even further. Moreover, the internet services are being constantly developed, which allows consumers to enjoy high download speeds. As a result it will allow Netflix’s customers to stream high definition video content at ease. Netflix has developed multi platform streaming capabilities, due to which the consumers can now be able to stream video content on multiple platforms like Xbox, Nintendo Wii, Sony Play stations, Smart TVs, etc. This will allow the company to add more value to the customers and will eventually increase the consumer preference. The streaming subscription of Netflix is solely based on online consumer spending. The huge development of the e-commerce business in the American market suggests that the customers are increasingly spending more on online transactions. As a result, it will eventually act as a major determinant of Netflix’s success. The company has entered into several strategic partnerships with production companies. In 2012, Netflix entered into a business deal with Walt Disney, which made it an exclusive distributor of animated and live-action movies of Walt Disney. Netflix has also entered into a multiyear contract with ABC television group (Marketline, 2014). Thus it will allow Netflix to increase its customer base and give a competitive advantage over its rivals. Internal Analysis Competency Framework The core competencies and resources of Netflix have been discussed by the Competency Framework model. The model covers four quadrants, threshold resources, threshold competencies, unique resources and Core competencies (Kotler and Keller, 2011). Figure 1: Competency Framework Resources Competences Threshold capabilities Threshold Resources Contract with suppliers Maintaining a sufficient collection of movie titles Threshold Competence Mail delivery system Online streaming capabilities and online transactions. Capability for Competitive advantage Unique Resources Strong brand image High Financial strength Core Competence Multiplatform streaming. Mobile device streaming Exclusive offering popular TV shows Source: (Created by Author) Threshold Resources: These are resources necessary to meet the minimum requirements of the customers. For Netflix, these resources are contract agreements with production houses, archive of popular movie and TV show titles and ability of order online at ease. Threshold competency: These are the necessary processes needed to meet the customers’ basic requirements. The threshold competency of Netflix includes proper mail delivery system for the DVD rental service and a properly maintained website to help customer’s stream movies and order DVDs. Unique Resources: The leading position of Netflix in the movie rental and streaming industry and the strong brand image acts as a unique resource for the company. Moreover, the financial strength along with close relationship with the supplier companies also helps Netflix to gain competitive advantage over its rivals (Marketline, 2014). Core Competence: These are the activities or process of a firm that leads to competitive advantage over the rival companies. These are often difficult for competitors to imitate. The core competencies of Netflix include the partnership with the major production houses to secure exclusive rights of content delivery. The company makes sure that it is capable of offering the most popular TV shows to the customers by going in to long term licenses with the suppliers. Moreover, Netflix also offers its streaming services in multiple mobile platforms and also in gaming consoles (Netflix, 2015b). VRIN Framework The VRIN framework assesses the capability of a firm’s resources to generate sustainable competitive advantage (Barney, 1991). Figure 2: VRIN framework of Netflix Capabilities Valuable Rare Imitable Non substitutable Competitive advantage DVD rental services X X Temporary Online streaming Sustainable Multiple platform support X Sustainable Variety of Title X Sustainable Convenience for consumers Sustainable Source: (Created by Author) Based on the VRIN analysis of Netflix it can be stated that the company holds a sustainable position in the industry. The company has managed to achieve a huge number of customer base and a wide distribution channel. The US market is dominated by Netflix’s streaming services owing to its large variety of movie and popular TV show titles. Moreover, the company also offers multiple device support which at this point is not offered by any of the rival firms. These value propositions, being hard to imitate creates a competitive advantage for the company. However, the rental business of Netflix is being overshadowed by the streaming business, which suggests that the era of physical DVD business is about to get extinct in the near future. Value Chain of Netflix Figure 3: Value Chain of Netflix Firm Infrastructure Netflix holds the leading position in the movie rental and streaming industry Dominant in the US market Progresses in an innovative manner Human resources Encourages employees to generate new ideas through brain storming Technological development Streaming video content in multiple devices Development of Smart Movie selection software Procurement Signing contracts with several production companies, to gain exclusive distribution rights. Inbound Logistics Operations Outbound Logistics Marketing Services Acquiring license contracts from production companies. Inbound logistics of physical DVDs from suppliers. Proper maintenance of the servers, to ensure unhindered streaming services Ensure fast response time to consumer DVD orders. Faster Delivery of DVDs to the consumers. Advertisement in internet banners, news paper, magazines, etc. Free shipping of DVDs. Instant streaming of video content at anytime, anywhere. Source: (Created By Author) Critical Success factors The company holds a huge archive of movie tiles and popular TV shows, which attracts a lot of customers. The company offers multiple platform support of streaming services along with smart movie selection software has led to increased consumer preference. Employees of Netflix are encouraged to generate new ideas, which help the company to adapt to the changing market environment. Issues and Challenges faced by Netflix Netflix’s revenue as well as stock prices increased substantially from January 2010 to June 2011 owing to its increasing number of subscribers and brand preference. The company eventually decided to implement certain strategic changes in their business operations which forced them to increase the prices of the subscription plans. The new plans established by Netflix divided the DVD rental and streaming services and introduced standalone unlimited streaming and unlimited DVD rental services. Thus for getting both the unlimited services, the consumers needed to make two separate subscriptions which would cost them $15.98 per month in contrast to the previously offered $9.99. These changes made the customers tremendously dissatisfied and several customers started to cancel their subscription plans. As a result the stock prices started to fall, and the investors started to lose interest on the company. The company announced that there will be two separate websites for the two services. This decision even worsened the condition, as this idea was rejected by the subscribers and investors. As a result the stock prices fell further down and the company started losing its customers (Thompson, 2013). Generation of strategic growth options Ansoff Matrix The Ansoff matrix discusses a firm’s strategic decisions based on its product and new market development. Figure 4: Ansoff Mtrix Source: (Kotler and Keller, 2011) Based on the business operations of Netflix, the company follows two strategies, market penetration and market development. The market penetration strategy allows the company to push its existing products in the existing market. Netflix has decided to streamline its business operations and separated its rental and streaming services, which resulted in customer dissatisfaction. However, the company could introduce a series of new subscription plans that would give the customers flexibility in their choice. Although the DVD rental service is losing its popularity, but the combination plans would allow Netflix to keep the rental service sustained for a longer period of time. Moreover the company has also gone for market development strategies, by moving to new geographical locations like South America and Canada. However, the diversification did not prove to be fruitful for Netflix. The company could have move to the Asian market where the number of potential customers is quite high (Thompson, 2013). Evaluation of strategic growth options SAF framework Suitability: The subscription plans should be made flexible and broken down into several plans such that the consumers can easily choose between the suitable plans. The new plans should be implemented based on movie genres, which will increase the perceived value for money for the consumers. In order to keep the DVD rental business sustained, the plans should be designed in such way that will allow the customers to subscribe to the rental and streaming services at the same time. Moreover, the overseas expansion to the Asian market will allow the company to gain more preference owing to the high popularity of streaming services. Thus it can be stated that these growth options are suitable for the company. Acceptability: The proposed changes in the subscription plans will add more value to the customers, by offering them more options to choose from. As a result it will increase consumer preference which in turn will increase the investors’ interest in the company. The high preference of streaming services in Asian market will allow Netflix to gain consumer preference in that region. Feasibility: Netflix has sufficient financial recourses to implement an overseas expansion strategy. Moreover, breaking down the subscription plans into flexible genre based options can be easily done by the company owing to its huge movie archive and a wide range of customer base. Description of Selected Strategy Between the two proposed growth options, the redesigning of the subscription plans is a better choice for the company. The customer dissatisfaction due to the splitting of rental and streaming services suggests that the customers look for value creation. Thus offering them a suitable plan based on their personal likings will eventually gain customer preference and will help the company to regain its market share. Overseas expansion could be a viable option but it requires huge capital investment than redesigning of the subscription plans. Moreover, the company has the necessary resources to change the subscription plans and at the same time generate revenue from the business operations. Conclusion Netflix holds the leading position in the movie rental and streaming industry. However, it has gone through a lot of ups and downs, resulting from certain unfavorable decisions. The company holds several unique competencies and resources like availability of huge database of movies and licenses to favorite TV shows. The company also operates in overseas regions outside US, which however did not turn out to be fruitful. The company has lost a fair amount of subscriptions owing to the huge customer dissatisfaction. In order to increase its reputation and customer base, the company has decided to cancel the idea of splitting the segments and stated that Netflix will follow the previous model of subscription. The internal and external analysis of the company suggests that Netflix is currently in a sustainable position to ensure future growth and geographic diversification. Reference list Barney, J., 1991. Firm resources and Sustained Competitive advantage. 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Does Netflix Really Have 20 Million-Plus Users in China? Research Firm Projects Massive VPN Base. [online] Available at: [Accessed 12 January 2015] Thompson, A.A., 2013. Case 3 – Netflix: can it recover from its strategy mistakes? New York: McGraw-Hill Education. pp. 474-498. Read More