Netflix is an example of excellent strategic management, where the company’s executives recognized the peak of demand for one service and introduced an alternative to retain customers. The company has become one of the world’s top online subscription services, providing its customers with access to films, TV series, and other content. Although the business began as a DVD rental service, giving no-late-fee rentals, which differentiated it from its competitors, later, the management of the company decided to focus on the online streaming service. This report will review Netflix’s current performance and evaluate its operations using SWOT, TOWS, Porter’s 5 Forces, Steeple-Pest, and CAMP tools.
Current Performance
Based on the financial indicators, the current performance of this business is excellent. Netflix is a profitable organization, for example, in 2011, the company had revenue of $3.2 billion, which is a 50% increase from the outcomes of the previous year (Hoffman, 2013). The majority of it, or $1,789,596, is attributed to the revenue Netflix received from its subscriptions. Internal factors analysis (IFAS) and external factors analysis (EFAS) will be used in the following sections to compare Netflix’s strategic position further.
Strategic Posture
Netflix clearly states the company’s vision, mission, and strategic objectives.
It declares its mission as “we promise our customers stellar service, our suppliers a valuable partner, our investors the prospects of sustained profitable growth, and our employees the allure of huge impact” (“Netflix,” n.d., para. 1). This reflects the strategic objectives of Netflix – the business aims to operate in a way that will satisfy all of its stakeholders.
In terms of corporate governance and top management, Netflix appears to have hired qualified executives. One of the co-founders, Reed Hastings, retains the position of CEO. Other executive managers have been with the company since its establishment or have relevant experience from other organizations. Netflix’s Board of Directors consists of both businesses’ co-founders and outside directors. Notably, the company did not have any problems connected to sustainability and corporate social responsibility (CSR). Apart from the unsuccessful rebranding, when Netflix aimed to disengage with its subscription service, the company’s strategic decisions were successful and allowed obtaining a vast subscriber base (Hoffman, 2013).
SWOT
Tables 1 and 2 are the SWOT factors with weight and ratings for each component.
Table 1. Opportunities and threats (created by the author).
Table 2. Strengths and weaknesses (created by the author).
TOWS
The TOWS matrix is similar to the previous analysis tool used to evaluate Netflix. However, the outcome of the analysis is different because TOWS allows determining how each factor can be used for Netflix’s future strategy. Based on the SWOT factors above, the TOWS matrix for Netflix was created, presented in table 3.
Table 3. TOWS (created by the author).
Porter’s 5 Forces
The Threat of New Entrants
The business that Netflix was initially in – DVD rentals is no longer in demand, and more and more companies in the entertainment industry recognize that online streaming is the future. Hence, the likelihood of new entrants is high, which may include companies such as TV broadcasters, channel networks, movie production organizations, and others engaged in similar activities. An example is Disney, which recently launched its subscription service and will provide its content to users via Disney’s own platform. In summary, the threat of new entrants is high because other industries that offer entertainment to consumers are struggling with attracting people to physical locations, for example, cinema theatres, or to their TVs.
Bargaining Power of Buyers
Notably, the business model that is the basis of Netflix’s operations – streaming via subscription using the Internet, suggests that the switching cost for users is low. There are no additional fees a customer has to pay to switch from Netflix to a different streaming service and canceling the subscription is easy as well. As a result – the consumer has bargaining power over the service provider.
Bargaining Power of Suppliers
Here two types of suppliers should be reviewed – the content that Netflix creates itself and movies or TV series it buys from third-party production companies. As for Netflix’s own content – the bargaining power is low because the business can choose to invest in projects, the management perceives as successful. However, for companies that sell entertainment content to Netflix, the bargaining power is high because there is a limited number of businesses producing shows and movies. Additionally, if the product is in demand or the customers are anticipating its release, Netflix is interested in having it in its library to attract new subscriptions and satisfy the existing customer base, providing more bargaining power to the supplier.
The Threat of Substitute Products
The impact of this threat is low because there are no comparable alternatives to Netflix’s services. Only a few organizations offer a subscription and DVD rental service, which is Amazon, and several competitors offer similar streaming services, such as Hulu. The two can be considered a substitute because they provide original TV shows and series that Netflix does not stream.
Another substitute is entertainment streaming platforms and video hosting services, for example, YouTube and Spotify. Similarly to Netflix, they offer consumers the service of entertainment, however, since the type of content is different, the threat that customers will choose one of these options instead of Netflix is low. One way of mitigating the threat of substitute for Netflix is to continuously update its library of movies and shows to ensure that customers always have something to watch.
Competitive Rivalry
The main competitors are companies operating in the entertainment industry – movie and series production businesses, TV channels, networks, and broadcasting services. In addition, more and more businesses establish their own streaming platforms, meaning that consumers will choose a preferred streaming service based on the content offered by the company, making original shows and movies significant for success.
Moreover, since Netflix still provides the DVD renting service, other organizations that rent physical copies of films and TV series are its rivals.
The central aspect of the competition is pricing – the rivals try to attract customers by offering lower prices, deals, and promotional offers, even allowing them to access the services for free for several months. This strategy is connected to the subscription-based nature of streaming services because they are mainly interested in customers who purchase subscriptions for a year or longer. Among Netflix’s major competitors, there is Amazon, offering both streaming and DVD rentals, and Hulu, which is an online streaming service.
Steeple-Pest Analysis
Socio-Cultural
Although Netflix is offered globally, some of its content may be perceived as inappropriate in countries with different traditions and religious backgrounds, for example, in Arab countries.
Technological
The streaming platform relies on technology to provide quality services. The broader adoption of high-speed Internet is beneficial for Netflix. Other developments and innovations should also contribute to the positions of the business, for example, the adoption of portable devices or more people using laptops. Therefore, the development of technology is beneficial for this business.
Economic
Netflix is vulnerable to price changes, as was shown by the decision to increase subscription costs from $9.99 to $16.00 per month in 2016 (Hoffman, 2016). The company lost 800,000 subscriptions, which affected the market share price.
Environmental
Netflix does not use natural resources. Hence the company can focus its CSR on the use of electricity necessary to support the streaming.
Political
Since Netflix is a United States-based company, it is unavailable in some states that have tense relations with the country’s government. An example is China, where an additional factor is a censorship that would impose restrictions on the content Netflix provides.
Legal
The main legal concern of Netflix is the intellectual property and copyright and means of protecting it. Illegal torrenting and copying content is a concern both legally and due to revenue loss, since the company’s primary source of revenue is content.
CAPM
The capital asset pricing model (CAPM) allows determining the rate of return for Netflix’s risky assets. Using CAPM’s formula that includes Netflix’s expected return of investment, the risk-free rate, which is estimated at 1.28%, beta at 1.47%, and risk-free premium, one can establish the rate of return, which in this case is 16.85%. These calculations show the rate of return that investors of Netflix can receive from Netflix.
Summary
Overall, this strategic audit report reviewed Netflix, its strengths and weaknesses, as well as a competitive advantage using a variety of tools. The analysis shows that this business has a strong brand and global presence. However, the rising cost of content and the threat of emerging streaming services are becoming a significant concern for Netflix. The company should focus on reducing costs and producing more original content or explore additional sources of revenue, for example, advertising.
References
- Hoffman, A. N. (2013). Netflix, Inc: Rebranding and price increase debacle. SAGE Knowledge: Cases
- Netflix. (n.d.) Web.