Netflix is a provider of on-demand internet media, which is based in the United States, the United Kingdom, the Caribbean, Canada and Ireland. Netflix Inc. is a subscription television and movie show service provider that provides media to subscribers in a diverse setting via the mail and online streaming. Netflix as a company was founded in 1997 under the partnership of Reed Hastings and Marc Randolph, who previously had been working together for another company known as the Pure Software.
After having undergone many transformations and developments, Netflix Inc. is now one of the most reputable global providers of video and internet media entertainment, in the vast industry of video entertainment (Mayfield 124). The company’s structure consists of three main horizontal markets which include theater, hotel and airline video entertainment. The market is further segmented into various strategic categories which include online rentals and sales, brick-and-mortar rental and sales, mail-delivery services, DVD vending kiosks, and services of video-on-demand, which can be accessed through the television.
Netflix begun its activity by making DVDs available through the mail and they eventually operated on a monthly subscription without any reason to impose fine or penalties on late titles. Commissioned in the year 1999, the monthly subscription service provided customers with the possibility to rent unlimited number of DVDs without any extra fee. With the rapid changes in technology, this model quickly dealt a final blow to brick and mortar stores. Courtesy of Netflix, streaming video has become available directly from the internet to the televisions at home and for these reasons, there was no doubt that the consumer has become more of a target to the industry than ever before.
With all these exclusive products and services under its name, there is no doubt that Netflix is indeed among the largest video game and on-line DVD rental service providers in America. The company enjoys a special business pattern and this continues to place it ahead of its competitors in the industry. This paper examines the company’s external analysis of six integral sections which include Environmental analysis, Hostile and passive environment, Porter’s Five Forces of Market, Integration, SWOT analysis, and Implementation.
In business, environment refers to a set of factors which are likely to influence the business in one way or another. Businesses have to react to the various external factors or influences that do happen in their surroundings. These largely affect their main internal functions, objectives and strategies. These factors are mainly external and include social political, economic, legal and ethical among others.
As it will be observed, the degree of competition remains the biggest environmental influence on Netflix and some of the major competitors in the field include Time Warner, Blockbuster, Direct TV, EchoStar, Comcast, AT&T, RedBox and Wal-Mart. All these competitors are observed to exist in the same line with Netflix Inc. across different segments of the vast video industry in both, online rental and mail delivery segments. Other emerging companies, such as Intelliflicks and Cleanfilms are also said to be active in the market, but their influence has not been sufficient to be termed as a threat to Netflix. As it will be observed, Movie Gallery and Blockbuster Inc. are currently among the strongest competitors of Netflix in the market.
Incorporated in Delaware in the year 1989, Blockbuster Inc. has been the biggest business threat to Netflix for many years now. Ever since its inception, Blockbuster, Inc has acquired a great recognition across the world, as a major renter of DVDs, video games, and video cassettes in the U.S., as well as in Asia, Europe and Australia. For example, as in the year 2004, Blockbuster already established 9,100 stores across the U.S. alone, and about 24 in other foreign countries. These developments came along with the establishment of an online rental program in the same year, and this was a wonderful transformation that would pose serious competitive challenges for Netflix and other developing companies in the industry.
Netflix’s competitive advantage formulation
To be able to accommodate many challenges frequently posed by the competitors, Netflix has managed to formulate a number of appropriate strategies that would help them achieving their organizational objectives. These strategies include patented methods of web-based selection of DVD, first mover advantage in on-line rentals and monthly subscription-based services that are customer-oriented. The company applies these strategies to assemble all the details that matter to consumers and delivers them in the most appropriate ways. These strategies are the basis for the company’s outstanding competitive advantage and they do help greatly in accomplishing its organizational goal.
Netflix suppliers are much concerned and they offer smart products differentiation. Movie studios are observed to command more than 50% of the overall theatrical release sales. Some of the major studios offering mass markets for popular titles include Warner Bros, Buena Vista, 20th Century Fox, Universal, Sony Pictures and Paramount Pictures. Emerging independent suppliers are also suppliers to competitors in the industry, but they do have less archived titles and less new releases as well. Increased access of consumers to independent films and titles has been observed, with Netflix making up about 60-75% of independent post-theatrical release revenues in studios.
Consumers in the industry are divided into two main categories: convenience and needy consumers. Convenience consumers are increasingly becoming more common nowadays. This type of consumers would watch videos when possible and when they can. More importantly, they also value immediate and easy access, transferability and portability of the products, and more than willing to have time to watch video on the internet.
However, many of these consumers will rent materials posted online more frequently and will go for programming and other stuff that is illegally posted on the Web. These types of consumers don’t require devoted equipment such as home theatre and television to access online rental stuff. However, these consumers are observed to have a higher substituting propensity compared to the needy consumers and would watch live programming, play video, listen to music, or even spend their time on other non-media forms of entertainment and recreation.
Needy consumers, on the other hand, are choosy and more particular when it comes to entertainment stuff. In most cases, this type of consumers tend to have a specific preference of certain titles or genres and for this reason, they often end up in being niche consumers in the market. Some of their specific characteristics include relaxing in comfort and watching television which has been fitted out with full audio sound; a practice which encourages them to use hardcopy media materials.
People belonging to this category of customers are also much willing to remain patient for a few days to get their titles, provided they fully satisfy their needs and meet their interests. Another common characteristic of this group of consumers is that, they are more likely to be more mature or even older, and they would tend to invest more energy and time in their preferences, since they access rental materials via channels and mediums that are more traditional. This category of consumers will more likely have to subscribe to mail delivery services such as Netflix and be able to get new arrivals at brick and mortar points nearby.
Hostile vs. Passive environment
Just like any other organization, Netflix as a company is based on both, hostile and passive environments. However, Netflix maintains a low profile scene for the outsiders to notice anything dubious and this makes it difficult for one to understand their hostile environment rather than their passive environment. The internal company presentations paint a rosy picture of good interpersonal relationships between the company and its many employees. This is characterized by high personal freedom, unlimited vacation time and high pay and benefits among other impressive packages.
However, underneath the seemingly interesting employee treatment, there lies a hostile environment which reveals other side of the company; its concealed strictness. For instance, the company has an incessant habit to make the employees’ life a complicated ordeal by managing its reinforcements and terminations in a specific way. Netflix is the type of organization that values quality of end-products to the extent of forgetting the value of their employees who are the key assets in the organization. There is enough evidence that, the company dismisses its workforce anyhow, making every event to serve as a lesson to others.
Porter’s Five Forces of Market
Porter observes five forces of market that help in shaping industry competition constitute of five main forces which include “the bargaining power of consumers, threat of new entrants in the market, suppliers bargaining power, competitive rivalry in the industry and threat of substitutes” (25). Netflix widely applies the concept of Porter’s Force in shaping up its competitive advantage in the vast video and internet media entertainment. As it will be observed in the analysis that follows, each of porter’s forces plays a significant role in the development of the company’s business model.
Threat of New Entrants
Considering the threat of new entrants in the movie rental industry, Netflix has adopted new ways of dealing with the incessant pressure of new entrants. Obviously, competition develops an enterprise of significant level to be termed as a threat. However, considering the volume of software, hardware and personnel, the initial competitors’ cost will be very high. Competitors in the sector will not be ready to compete in online grounds and thus, they will have to refrain or even replace their staff to cope up with the pressure. This trend ends up benefitting Netflix in a number of ways, since their distribution channels are already under full control of online social trends.
Suppliers’ Bargaining Power
Pressures of suppliers bargaining power are observed to be minimal with Netflix owing to a number of reasons. First of all, the switching cost among the key suppliers is minimal. There is also no substitute for suppliers attached to the company. More importantly, suppliers are expected to increase costs as the industry earnings increase while the volume disposed by Netflix offsets the increase. In this case, there is no likelihood that consumer demand for Netflix products will ever lessen in the nearest future.
Buyers’ Bargaining Power
Customers’ bargaining power plays a key role in determining the overall pressure consumers exert in the market. This is highly considered by Netflix through a number of approaches as will be shown below. Generally, consumers will not buy large quantities of the product. The operators in the industry are few. Fixed cost bin the industry supply is relatively high and this will also be applied to the surrounding competitive parties. Netflix offers the products at a cheaper cost compared to brick-and-mortar rivals in the market, thus matching the price-sensitive habits of the consumers. The product cannot be produced by the customers. The product is meant for entertainment purposes and nothing else. And lastly, the average consumer will not have any slightest idea of the cost production.
Threat of Substitutes
Regarding the threat of substitutes, Netflix Inc. operates in a business environment which does not have anything to do with the threat of alternative products. Alternative modes are only observed in the distribution process. Customers are certain to get similar brands of the same value and quality with Netflix as with any other player in the industry. There are close consumer relations within the company, as it will be observed through the online tools. Netflix does not benefit the idea of switching costs. There is no doubt that the company venture into the new economy places it ahead of its competitors when it comes to acquisition of new fads.
Video rental industry is observed to be bulging with competitors. However, the strategies applied by most of these competitors are old-fashioned and less effective in their impact on the market. Even though the products provided by competitors in the sector are the same, Netflix’s full utilization of online services makes it the most preferable choice for consumers. The market advancement in the industry promises to be constant.
Netflix as a company enjoys a massive recognition and customer loyalty in the entertainment video industry owing to their exclusive products and services. Netflix also enjoys a flexible organizational structure, a trait that allows it to adjust to immediate actions whenever it is necessary to match with the market needs and demands.
The company has recorded a high market share over the recent past years when compared to its primary competitors in the industry which include Blockbuster, Inc., Comcast Corp., and Time Warner Inc. Netflix has a 5% market share of the entire industry and this is a very low record compared to that of Wal-Mart and Blockbuster who enjoy the largest shares in the industry with 30 and 20 percent respectively (Sunil & Donald 89). In terms of video DVD rentals within the industry, the company has a market share of 13% while Blockbuster enjoys the majority share of 52%.
With an increasing Net Income Margin Percentage over the years, Netflix enjoys a relative financial strength. As one of the leading companies in the DVD rental services, Netflix enjoys a high market potential with its reliable products which are effectively made available to customers in all segments of the vast entertainment market. More importantly, the company delivers a wide array of superior and unique mix of valued products to the consumers and this increases their exclusive productivity advantages in the market.
However, despite the outstanding reputation of the company in the industry, it is still yet to be strong in major markets compared to some of its competitors in the industry such as Blockbuster, Inc. who offers a variety of exclusive products apart from renting and selling Video DVDs. Blockbuster’s wider product lines are offered on a one-stop shop basis and this is the reason why customers would like to place value on the company (Dolbeck 8).
Following is an outline of Netflix’ Strengths, Weaknesses, Opportunities and Threats.
- Strong Brand Recognition
- Expansive Selection of Movie
- Monthly Revenue Streams that are Reliable
- First Mover Advantage
- Low Overhead Costs
- Fair & Affordable Product Pricing
- Many Distribution Centers
- Lack of Control Over Time of Return for DVDs
- High Possibility of Broken or Scratched DVDs owing to the Mailing Process
- Discouragement of Membership From Less Frequent Movie Viewers Owing to the Monthly FEE
- Comparatively Small Library of Movie Available to Stream
- Expanded Movie Offering That are Downloadable
- Expansion of Partnership Relationships With Technology Providers and Content Providers
- Expansion of Product Line
- Print 3rd Party Publicity of Red Envelopes
- Availability of state of the art medium channels
- High Competition in the Video Rental Industry
- Staying power of DVDs
- Contractual restrictions on streaming content
- DVD competition from major rivals such as Blockbuster and Red Box
- Frequent adjustments of prices to cover new expenses
Considering the outstanding market position enjoyed by Netflix, they stand a strong potential of making a successful push into new markets of the expansive DVD rental industry. With the heightening competition in the industry, there is a need for Netflix to adopt new ways of meeting the consumers’ demand of the day at all levels so as to remain in line with other major players in the industry (Davenport 27).
For example, the company should carry on with its plan of streaming video since the demand for streaming is likely to increase in the future, thus replacing the conventional way of renting Video DVDs via mail and in-store. For short-term implementation plans, the company’s current business model allows for all the necessary interventions required to enable them stream movies directly onto the gaming consol of consumers.
This move would take Netflix to new levels of business whereby they would be able to expand their accountability in the entertainment industry, by attracting new customers who are more interested in games and less interested in movies. However, it would be a wise idea for the company to adopt a fifth pay structure that includes rentals of video games. By doing so, the company will succeed in keeping its customers happy and satisfied, by just adding another interesting feature to their entertainment. This approach is more likely to place the company in a more advantageous position that would see them raise the value of what they can bring to the consumers. As a result, Netflix will have the streaming ability on their side and this will ultimately enable them to compete effectively with the giant competitors in the market.
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Dolbeck, Andrew. “Valuation of the e-Commerce and internet services industry.” The Weekly Corporate Growth Report 1354. 1 (2005): 3-8. Print.
Mayfield, Scott. Netflix. com, Inc. New York: Harvard Business School Publication, 2000. Print.
Porter, Michael. “From competitive advantage to corporate strategy.” Managing the Multibusiness Company: Strategic Issues for Diversified Groups 285. 12 (1996): 22-27. Print.
Sunil, Gupta and Donald, Lehmann. “Customer lifetime value and firm valuation.” Journal of Relationship Marketing 5. 3 (2006): 87-110. Print.