Strategic Analysis of NETFLIX - Essay Example

Strategic Analysis of NETFLIX Netflix provides the world’s largest on demand movie platform for film lovers to have movies of their choice delivered to them with nominal charges. Founded in 1998, the company has seen sharp rise in its business owing to the unique concept of renting out movies without any ‘late fees’. 1. SWOT Analysis Strengths Leadership in market: Netflix is an undisputed leader in this kind of business, offering millions of subscriber’s access to a wide range of titles. Satisfied Customers: The fact that Netflix is able to deliver most of its orders within a day helps the company in retaining its customers. The professional approach adopted by the company has been able to see exponential growth. Personalised Merchandising: The use of Recommendation services has proved to be a useful tool for creating a customised interface for the customer. The company keeps updating its stock of movies depending upon the ratings received from the customers. Professional Touch: Perfectly streamlined and highly professional operations with millions of subscriptions within the initial years. Patent with the Company: In 2003 Netflix secured the patent for 20 years for many features of the business model being practiced by the company. This also helped in taking care of the competition. Special Arrangement with Postal Department: Netflix has been managing the dispatch and receipt of DVDs quite efficiently with US postal services, by way of a special arrangement, which is helping the company not only in speedy delivery of the consignment by in saving some money on postal services as well. Weaknesses Not enough emphasis on technology: While the online community is growing very fast around the world, Netflix continues to lay the emphasis on physical exchange in DVD format. This could prove quite challenging for the company if the speed of download increases in next couple of years. The company would therefore have to explore the movie download market for long term survival. Limited areas of operation: Netflix appears quite content with the levels of operations in US market. The company must realise the potential of vast markets, particularly in the Asian region. Opportunities Emergence of Bly Ray: Though the blue ray disk market still appears hazy on account of discussion still going on about the fate of this new technology. But the fact that Netflix has started exploring this market as well bodes well for the company in the long run1. Growth in online rental market: The online DVD rental market has seen a fast growth in recent years. Datamonitor (2007) further projects that by 2010, the US DVD sales and rentals market is expected to grow to around $35 billion from $26.8 billion in 2005. Investment in online delivery: Though Netflix has been predominantly concentrating on the physical medium, but there are some indications suggesting that seeing the high growth in broadband population, Netflix has started working to this end. This step, if taken with due consideration towards all aspects, will certainly go a long way in making the company more popular amongst film lovers. Strategic Agreements: Netflix has recently entered into strategic agreements with companies like Wal-Mart, a renowned name in retail business. Such strategic tie-up not only helps in containing the ferocity of competition, but it also helps in propagating the cause of the company. In a similar tie-up with Microsoft2, the software leader, Netflix movies can now stream through the Xbox, which will certainly help in gaining a few more patrons. Threats Emergence of new competitors: Some companies like DVDXpress, have started gaining acceptance amongst the movie lovers. This company has come out with innovative idea of launching DVD kiosks in a business model similar to that of Netflix. But the ATM style availability of DVDs is giving an edge to DVDXpress, which might eat up into Netflix’s domain in the near future. Patent Litigation: In the recent past, some consumers have filed a case against Netflix contending that the company has obtained patent for its business operations through deceptive means (Datamonitor, 2007). Some competing companies have also lent their support to this initiative. Increase in the cases of Movie Piracy: Advancements in technology have made the copying and pirating business much easier. Though the federal agencies have waged a war for containing such illegal business, but it might eat up into the business prospects of the company in the near future. 2. Resources and Capabilities Resources: The resources of Netflix, assisting the company’s growth and development can be summarised as follows; i. A unique concept ii. Special arrangement with US postal services iii. Supportive and efficient workforce iv. Sound financial strength v. Supportive legal framework vi. Adequate support from suppliers of DVDs and film-makers vii. Huge pool of loyal and satisfied customers viii. Increase in the number of new movies being produced worldwide on a wide variety of themes. ix. Good infrastructure for carrying out the dispatch Capabilities: Netflix is known to be capable of i. Delivering the consignments on-time in majority of the cases ii. Delivering DVDs free of any charge to its members by first class mail, with a postage-paid return envelope, from over 100 U.S. shipping points3. iii. Taking due care of its customers in case of any grievance or complaint iv. Listening to the feedback of the customers and tuning its services accordingly v. Taking care of its competitors, which has resulted in failure of some companies in the business of providing similar services vi. Carrying out the business operations in line with an acceptable corporate behaviour and adhering to the code of ethics, put in place by the company. 3. PROFIT Analysis Physical: Company has a good storage space complemented by over 100 shipping points around the country. The company has a wide variety of film titles in its storage, which caters to people with different tastes and profiles. Reputation: Netflix has been rated as the number one in online retail customer satisfaction by independent a number of surveys4. In fact, the exponential growth in customer base is an indication towards the reputation of the company. Couple of companies having tried their hands on similar lines could not withstand the high reputation of the company. Organisation: Netflix being a retail organisation it doesn’t require too many managerial levels in the hierarchy. What it has is an efficient customer care department, able supported by the human resources department. For effective functioning of the company these two departments are integral components of the organisation. Financial: Company has registered impressive growth even in its formative years and this trend has continued unabated all along. With healthy profits being achieved by the company, it is in a position to consolidate its position. Netflix was able to post its first profit of $6.5 million within the first five years of its operation and has not looked back since then, even under adverse circumstances. The sale of used DVDs further helps the company in earning revenues. Intellectual and Human: When the company started off the business, nobody would have thought that it would be able to write such a success story. But the company was able to make the unique concept an acceptable and profitable business operation points towards a sound intellectual proposition on the part of the owners. As they’ve patented the concept for now, it is beyond doubt that they’d keep on improvising on the concept in future as well. Human resources for the company have also provided good support, as they are the one’s who interact with the customers, carry out the routine tasks etc. If they are able to satisfy the customer, than it implies they are an asset for the company. Technological: Though the existing business operation of the company is not technology intensive but the recent technological advancements hold a promising future for the company. Realising the trends, Netflix too has started investing in technology as the company claims5 that, many of its core competitive advantages transition well into Internet delivery of content, which includes, interactive websites and personalised movies based on the recommendation process. 4. VRIO Analysis Value: While planning for long term objectives, the company will have to remain competitive. Porter’s value chain (1985), provides an important tool for a tool for developing and sustaining competitive advantage for a company. It underlines the need for creating and retailing value for the organisation. Value, in general, can be defined in respect of customers, employees and owners or other stakeholders. Value addition is considered an important ingredient in dealing with the competitions, as it provides the organisation with a strategic tool. An individual’s beliefs or conceptions about what is desirable, good or bad – forms the value system (Kotler, 1974). Innovation, excellence and value go hand in hand in today’s competitive environment. Customers and the target market are crucial stakeholders for any organisation. Configuring value means defining, creating, branding and pricing the offer. Netflix has so far been able to achieve exceptional success on all these fronts. With the help of satisfied workforce, the company is able to take good care of its customers, their recommendations etc. which is of course being reflected in the balance sheet. Rareness: The concept of DVD rentals that too without any late fee or postal charges from the customer must have forced the people initially to think about the dismal future of the company. But the reality that Netflix is able to sustain the growth all these years and make room for itself in all nooks and corners of America must be hailed as the success of a rare concept in DVD rental. Company is busy finalising its plans to carry a stamp of rareness in online movie downloads as well. Imitability: Many companies have tried to imitate the business of the company in different forms, but so far with minimal success. Even, a company of the stature of Wal-Mart had to withdraw from the DVD rental market and firmed up strategic ties with its competitor, speaks volumes about the strength of the uniqueness of the business of Netflix. The business therefore appears non-imitable and there will be significant cost disadvantage to a firm trying to copy the concept. Organisation: Traditionally ‘maximizing’ profits has been considered to be the objective of any organization. But now this criteria has been discarded. Now organizations are supposed to have multiple objectives, monetary as well as non-monetary. While short term objectives rely on the profitability aspect, long term objective take care of the sustainability aspect. Netflix appears to be evenly balanced in managing the organisation from a long term perspective. 5. Balanced Score Card Netflix is rated as the number one company in the business While the company is being criticised for not being properly attentive towards the technological advancements, particularly for ignoring the movie download market, but the company is not blind to such business propositions either. The company may not be able to charge a higher amount in subscription charges for taking care of the damages etc. but it has been able to tilt the economies of scale in its favour with the help of sheer volumes. Earlier brick and mortar DVD rental companies used to earn huge revenues in the form of late fees, but Netflix gave away this temptation, which resulted in two fold impact; one, the concept was appreciated by customers, two, rival companies could not withstood the onslaught. The company has been able to record incremental revenue figures over the years. Increasing broadband speeds, setting up of DVD kiosks by some companies are the alarm bell for Netflix and the coming couple of years might prove crucial for the sustenance of the company, depending upon how it reacts to these developments. 6. Strategic Business Units & Business Plan adopted Strategic business units for the company include; The storage facilities The customer care centres for handling calls from existing and prospective customers The DVD handling units The sorting offices, which need to be very efficient for speedy delivery The Postal department too must be seen as a strategic business unit by the company, as they are the key to speedy delivery of the consignment The HR department which needs to constantly work towards motivating the workforce in order to come upto the satisfaction of its customers. Netflix doesn’t have a complicated or elaborate business plan. In simple terms, its business plan includes supplying the DVDs to movie buffs in shortest possible time. When the customer finds the desired DVD the very next day, it helps in delighting the customer, as the freshness and enthusiasm about the new movie is retained. A satisfied customer subsequently becomes a brand ambassador for the company. 7. Others complementary analysis integrating Strategic Financial Analysis Strategic decisions are concerned with the issue of setting a direction for the organization to move or the course the organization will follow Though very crucial, yet preparing ‘strategic moves’ for future often is not based on hard fact, but on presumptions. It involves past experience, forecasting and ‘surround-effect’. Strategic management can be described as what Bernard called ‘maintaining the organization in operation’6. For any organization to function effectively; three main aspects are critical; Eliciting the contribution from all concerned Organising the workforce by assigning them the responsibilities, and Developing an information system for monitoring and coordination activities. While Netflix has been quite consistent in its financial earnings, the company has also come out with value added services. The recommendation process helps the company in improving its business prospects. Netflix faces severe threat from companies like Amazon, Apple, AOL, News Corp etc. which have started offering movie download services, but as of now these companies are also trying to seek solutions to the downside of downloads, particularly the download time and the quality as compared to DVD. This provides ample time and opportunity for Netflix to think over its strategies for sustainable growth. Low entry barriers for web based business consumer firms, might make the turf somewhat difficult for the company in the virtual world, but if it goes by the suggestions of the analysts towards a multiple business model, the company is bound to benefit in the long run. References 1) Bernard, C.I. (1962), Functions of Executives, Cambridge, Mass, Harvard University Press 2) Datamonitor (2007). Company Profile-Netflix. Datamonitor Business Information Center, Europe, London. 3) Netflix (2008). Media Center-Netflix. Available online at http://www.netflix.com/MediaCenter (July 13, 2008) 4) Philip Kotler, (1974), Marketing Management, 2nd Ed., Prentice Hall, NY. 5) Porter, M. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. Free Press, New York. 6) Seeking Alpha (2008). Microsoft-Netflix Agreement: A Frustrating Offer. Available online at http://seekingalpha.com/article/84940-microsoft-netflix-agreement-a-frustrating-offer?source=bnet (July 15, 2008) 7) Tech 2.0 (2008). Netflix Goes the Blu-ray Way. Available online at http://www.tech2.com/india/news/dvd-players/netflix-goes-the-bluray-way/28541/0 (July 12, 2008) Read More