Netflix: Strategy Analysis

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Current Situation

Current Performance

In 2019, Netflix demonstrated successful performance in its business industry. The company’s total assets are estimated at $33,975,712, while the market shares reached $437,799 (basic) and 451765 (diluted). As a result of its investment activity, Netflix received $387,064 of cash.[1]

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Strategic Posture

  1. Mission: Netflix provides customers with access to TV shows, movies, and other entertainment products.
  2. Objectives: The corporate objective is to provide quality services according to the customers’ demands; the business objective is to develop globally and increase the number of clients. The functional objective of the company is to improve customer convenience.[2] The objectives seem to correspond to the company’s mission and its current values and priorities.
  3. Strategies: Netflix collaborates with electronics companies to provide access to its products on different devices. It also develops original content to increase customers’ interest and offers its services abroad (for example, in Canada).[3] The strategies are aimed at improving the quality of products and developing globally.
  4. Policies: Netflix provides data and privacy protection; its content is protected by copyright and trademarks, which can only be used under permission. DVDs and streaming provided by the Netflix service are covered by patents.[4] Netflix regulations cover the most important aspects of the company’s business and comply with its main goal, objectives, and environment.
  5. The discussed characteristics are clear and consistent with each other. The company’s objectives and strategies demonstrate the tendency of its global development, as well as the maintenance of its status as a leader.

Corporate Governance

The company’s governance body includes eight officers and eleven directors. These employees with significant experience obtained their university diplomas in different institutions around the world (for example, in America, Australia, and Germany).[5] There are five most significant members of the company’s management:

  • Reed Hastings is the founder and CEO of the company, specializing in artificial intelligence.
  • David Hyman is the Chief Legal Officer with experience of work as a senior corporate counsel.
  • Jackie Lee-Joe, the Chief Marketing Officer, has more than twenty years of marketing experience.
  • Jessica Niel is the Chief Talent Officer responsible for careers in the engineering department.
  • Spencer Neumann is the Chief Financial Officer with the experience of working in the Walt Disney Company.[6]

External Environment: Opportunities and Threats

Societal Environment

  • Economical trends:
    • There is increasing financialization in the sphere of media and entertainment.[7] It can be a threat to the company since the success of Netflix may be solely evaluated by its market performance.
    • A shift in international expansion may be considered an opportunity for a company to boost its global success.[8]
  • Technological trends:
    • Cable and data providers control distribution; therefore, collaboration with such companies is the opportunity to succeed.[9]
  • Political-legal trends:
    • The role of privacy data is increasing and can be a threat to the company in case if it does not regulate privacy policy appropriately.[10]
  • Socio-cultural trends:
    • Increasing media influence leads to audience fragmentation; the company needs to adapt to different groups of audience, for example, families. The inability to perform it may become a threat to its success.[11]
  • The discussed forces may vary due to the economic or political situation in particular regions.

Task Environment

  • The threat of new entrants.

The company is successful in the industry, and new entrants are not an immediate threat.

  • Bargaining power of buyers.

The bargaining power of buyers is high since there are certain demands of the audience concerning the price and quality of Netflix products.

  • The threat of substitute products or services.

This aspect may vary, as in some regions, movies and TV shows are available online: for example, in America, the threat of substitute products may be significant.

  • Bargaining power of suppliers.

Supplier bargaining power is rather high: for example, content suppliers like Amazon compete with the company in this business sphere. To make its services available on different devices, Netflix should also collaborate with popular technology providers like Apple.

  • Rivalry among competing firms.

Netflix’s competitors are other big companies like Disney + and Amazon, providing access to movies and TV shows.

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Immediate Environment

Today, the opportunity for Netflix is connected with the foreign audience and collaboration with technology providers. At the same time, its competitors with the same or better offers may become a threat to its prestige.

Opportunities and Threats that are Facing the Organization

The following opportunities are significant for the company: expanding globally, expanding the customer base, and collaborating with electronics providers. They all are connected with domestic and global development. The threats of the company include competition, finance, and social issues. Netflix needs to adapt to current trends to correspond to immediate market conditions.

Strategic Group” Analysis

Amazon is the major competitor of Netflix with the same price for products and services; moreover, like Netflix, it develops its own original shows. Disney + follows the same customer-oriented strategy by providing content for different groups of clients.[12] Both companies are rather developed and successful abroad, which makes them a possible threat.

Table 1

Netflix External Environment

Threats

Opportunities

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Financialization

International expansion

Role of privacy

Audience fragmentation

Competition

Distribution

Table 1 demonstrates that Netflix should pay more attention to its market share, partners, and privacy policy. Targeting different groups of customers, reaching foreign clients, and developing online and offline technologies may positively influence its performance.

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Summary of External Factors

Netflix can mostly be affected by technological and social changes since the world is experiencing shifts in technologies and globalization. At the same time, with the increasing role of finance, Netflix should pay attention to its investments and market share, as these factors may become decisive for its success. With competition presented by such companies as Amazon, Netflix should work continuously on offering the most diverse range of entertainment and attractive deals to customers to stay competitive.

Internal Environment: Strengths and Weaknesses

Internal Strategic Factors: Strengths

  1. Exponential and rapid growth, which Netflix has shown in the past ten years. The company is an influential online brand for streaming online content across the globe.
  2. The company has a worldwide base of customers in over 190 countries, and in the first quarter of 2020, it had 182 million subscribers, 69.9 million of which were from the United States[13].
  3. The originality that Netflix has brought to the market is another important strength. The company has been investing in producing original content of high quality to ensure that there is a high degree of value that customers place on the service for which they are paying. The popularity of such shows as Stranger Things, Orange Is the New Black, or Money Heist has caused the number of subscribers to increase over the quarters.
  4. Netflix offers adaptable services so that customers can use the application on multiple devices, including smartphones, personal computers, TV sets, and iPads. This has allowed growing the business quickly.
  5. The pricing strategy of the company has facilitated further growth because the plans that Netflix has designed are affordable and offer great value to customers who can watch movies and TV shows unlimited. The prices are lower compared to purchasing movies on the cable or going to the cinema while the selection is larger. For subscribers who want to get a premium plan, there is a more expensive but still affordable option.

Internal Strategic Factors: Weaknesses

  1. In order for the content provided by Netflix to be entertaining and diverse, the company is continuously increasing its operational costs. In the first quarter of 2020, the company’s operating expenses were $4.809 billion, which is an 18.4% increase compared to the same quarter of 2019.[14] The annual increase compared to the last year was 22.02%, with Netflix spending $18.3 billion.[15]
  2. There is an issue of limited copyrights on shows available on Netflix. The majority of original programming is not owned by Netflix, which means that the rights that are purchased from other studios expire, and the content can appear on other websites or platforms.
  3. At this time, Netflix has not developed a renewable energy strategy to facilitate environmental sustainability and decrease costs. The issue is important because competitors such as Apple, Google, and Amazon have already invested in sustainable solutions and using renewable energy to sustain their businesses.
  4. Because of the significant investments of Netflix in the diversification of content and capturing a global audience, the company continues increasing its long-term debt. Before the quarter ending on March 31, 2020, the long-term debt of the company was $14.171 billion, which is a 37.5% increase compared to the previous year.[16]

Strategic Alternatives and Recommended Strategy

Based on the exploration of internal strategic factors, it is recommended for Netflix to consider becoming a multi-sided platform (MSP). With the availability of IT and significant investment into it, the company can create a larger and more powerful with expanding scope and complexity. An MSP enables an environment for interactions and transactions between several groups of customers so that each member group can use the platform when more members of another group use it. The benefits of an MSP are two-dimensional: reducing transaction costs and reducing search costs.

The MSP approach is expected to help Netflix manage the continuous battle over content acquisition, which is becoming more expensive and involves more competitors. However, the large subscriber base and the infrastructure of content delivery can be attractive to any third party. It is recommended to allow such parties to sell their services and products within the platform but outside the Netflix subscription. This strategic approach is expected to enable Netflix to tap into a different growth dimension by selling more services and products to the already existing subscribers.[17] Moreover, the company can grow without having to produce or purchase new products, but rather by attracting third parties to do so. The ‘outside’ help can also be beneficial for experimenting with different forms of content, which are valuable for the efforts of Netflix to acquire or produce new content.

The strategy is also expected to reduce the high expenses that Netflix is currently spending on content production. While some work is needed in terms of resource allocation and the creation of a framework for facilitating the involvement of third parties, the benefits that would result from the integration of an MSP will be worth the effort. At this time, the company has little to lose and much to gain through the recommended strategic shift. An MSP implies that Netflix becomes an aggregator platform with multiple services and product providers who sell directly to customers. Becoming a platform means overcoming the challenges presented by competitors while also reducing the costs associated with the acquisition of content.

Footnotes

  1. Netflix (2019). Q4 2019 Financial Statements. [Excel document].
  2. Lussier, R.N. (2019). Management fundamentals: Concepts, applications, and skill development. SAGE Publications.
  3. Lussier, R.N. (2019). Management fundamentals: Concepts, applications, and skill development. SAGE Publications.
  4. Legal notices (2018). Netflix.
  5. Officers & directors. (n.d.) Netflix.
  6. Officers & directors. (n.d.) Netflix.
  7. McDonald, K., & Smith-Rowsey, D. (2016). The Netflix effect: Technology and entertainment in the 21st century. Bloomsbury Publishing USA.
  8. McDonald, K., & Smith-Rowsey, D. (2016). The Netflix effect: Technology and entertainment in the 21st century. Bloomsbury Publishing USA.
  9. McDonald, K., & Smith-Rowsey, D. (2016). The Netflix effect: Technology and entertainment in the 21st century. Bloomsbury Publishing USA.
  10. McDonald, K., & Smith-Rowsey, D. (2016). The Netflix effect: Technology and entertainment in the 21st century. Bloomsbury Publishing USA.
  11. Johnson, D. (Ed.). (2018). From networks to Netflix: A guide to changing channels. Routledge.
  12. Moskowitz, D. (2020). Who are Netflix’s main competitors? Investopedia. 
  13. Statista. (2020). Number of Netflix paying streaming subscribers worldwide from 3rd quarter 2011 to 1st quarter 2020.
  14. Netflix operating expenses 2006-2020. NFLX. (2020).
  15. Netflix operating expenses 2006-2020. NFLX. (2020).
  16. Netflix long-term debt 2006-2020. NFLX. (2020).
  17. Hagiu, A. (2018). The best way for Netflix to keep growing. Harvard Business Review. 

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