Analysising Netflix ” s Strategy

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Analysising Netflix ” s Strategy
Article · March 2013
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International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Index Copernicus Value (2013): 6.14 | Impact Factor (2013): 4.438
Volume 4 Issue 3, March 2015
www.ijsr.net
Licensed Under Creative Commons Attribution CC BY
Analysising Netflix‟s Strategy
Zana Majed Sadq
Department of Management, Faculty of Humanities and Social Sciences, Koya University, Iraq
Abstact: Netflix, a subscription -based online movie rental service was founded in 1997 by Reed Hastings. Netflix is an internet portal
through which subscribers can rent movies in DVD format and then have these DVD’s delivered to them directly to their homes.
Originally Netflix was based in the United States of America and it utilised the U.S. Postal service to deliver DVDs to its subscribers. By
the end of 2006, Netflix had a total of 44 distribution centres across the United States which made it easier and faster to deliver its DVDs
to a large number of its subscribers. Netflix, having a subscriber base of 6.6 million subscribers could ensure delivery of its DVDs to
more than 90% of its subscribers within a single business day and by the end of 2006, Netflix had achieved revenues of nearly $1billion.
(Rothaermel, 2012)
Keywords: Netflix, Strategic issues, PEST Analysis, Porter‟s Five Forces Analysis
1. Strategic Issues
As society and science technology develops, the Internet has
begun to change peoples‟ daily lives, such as the habits of
study, communication and entertainment. Thus, in the
context online business has become more and more
common. Netfixs was online business, founded by Hastings
in 1997. Its service item was online subscription-based DVD
rentals.
In the process of development, Netfixs existed seven main
strategic issues:
Firstly, Netflix ignored the actual situation and chose the
similar business model with the other famous internet brands
like eBay, Amazon. Because of competition advantages with
other retailers, Netflix did not realise this until they found
out the subscriber would not choose to return after their first
experience.
Secondly, In order to develop the market, the firm has to
spend much money to attract more new customers, and
Netflix neglect the coustmers service, so that some early
customers still lost by the slower service that Netflix offered.
Thirdly, Customers always like top new released movies
which were the most expensive, thus increased the cost of
Netfixs. As a result, the subscribers should expense more
cost to acquire new movie because of the strategy called „all
you can eat‟. And Netflix was always shipping the new
movies package which has some old movies, but most
subscribers may not like them.
Fourthly, the number of new films was less than the desired
one and it leaded to customers‟ dissatisfaction. Due to there
was no direct relationships with the major studios, Netfixs
only built its film library through relationships with a small
number of movie distributors.
Fifthly, due to Netflexs set up a single distribution center in
Sunnyvale and California, Post Office may spenda long time
to mail on cross-country andthen lead to extenddelivery
period. As a result, it lost a lot of customers.
Sixthly, According to the subscription-based
services,customer loss is the key strategic issue of
Netflix.Owing to the high competitive market and raise of
price, customer loss has become an urgent problem. Hence,
customer acquisition, which includes developing new clients
and retaining old clients, has become the main strategy to
improve the business performance of the company.
Finally, the threat from video on demand (VOD) influences
the performance of Netflix seriously. VOD can immediately
provide customers to watch latest movies. Therefore, they
consider that VOD is more convenient than DVD rental and
traditional video stores.
Netflix’s Strategy: An analysis utilising the strategic tools
PEST, Porter‟s Five Forces model and SWOT.
2. PEST Analysis
Netflix is subject to political, economic, social and
technological elements like other companies in the movie
rental industry. Changes to any of the elements in this area
might have a substantial effect on the business and
operations of movie rental companies.
1) Political factor
Netflix might be influenced by changing laws concerning
copyrights of certain kinds of content, like the television and
movie shows that companies rely on to present to customers.
Copyright law changes might affect Netflix ability to
distribute this content to customers which could significantly
impact business because this content might represent large
segments of a company’s services offering (Fritz, 2009).
2) Economic Factor
For Netflix competitive advantage to be maintained, it is
essential to price competitively against rivals. Netflix is
working in a business that depends mainly on the disposable
income of its clients. If the growth of economic rates were
slow and the power of customers purchasing are negatively
impacted, Netflix would feel the impact of this drop in
purchasing power first.
3) Social Factor
Netflix depends on the attractiveness of movies among
customers in the sectors of the target market. As the average
age of the potential consumers carry on growing older and
Paper ID: 22031503 2271
International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Index Copernicus Value (2013): 6.14 | Impact Factor (2013): 4.438
Volume 4 Issue 3, March 2015
www.ijsr.net
Licensed Under Creative Commons Attribution CC BY
filming expenditure among the older demographic turn out
to be less popular, it might adversely affect the business.
4) Technology Factor
Given that the core operations of its business are internet
based, Netflix has to contend with the continually
developing technology sector, as the industry progress
toward online expenditure. The Netflix market share is
facing challenges from new rivals, because of the lower
barriers to entry in terms of streaming content. The changes
of Technology in terms of the internet rates, imposes on
competitors in this industry, the need to continually
modernize their model of business to sustain market share.
(Netflix, 2009)
3. Porter’s Five Forces Analysis
a) Internal Rivalry
There is substantial rivalry and competition between the
offered companies in the industry, this include
Blockbuster, Amazon, and Redbox. This competition is
highlighted by the levels of marketing costs and
advertising incurred by each firm. Netflix in 2008, spent
over 200$ million in advertising which was dominated
by various affiliate marketing deals and online
advertisements, and remained at about 14% of revenue
(Netflix, 2010).
b) Substitute Products and Services
For most homes Digital cable is now necessary, therefore
many customers will have a film collection from their
cable network. “On Demand,” Services offered by cable
television providers might be a substitute for Netflix if
they increase their movie stock list to a similar title
selection. It is essential for Netflix to keep up with the
continually changing technology sector in order to
sustain its success. (Amematekpo et al, 2011).
c) Entry of New Competitors
Netflix have to keep on maintaining the rising popularity
of e-commerce such as an improvement and enhancing
their inventory of stream movies with raise their HD
streaming inventory. If this attempt is deferred, more
suitable earnings of renting movies will take over such as
“On Demand”. This is probable because the low-priced
entry barriers in the DVD industry linked to streaming
content due to the huge amount of streaming content that
could become obtainable to possible distributors.
d) Bargaining Power of Consumers
The industry of movie rental is an active industry. In
times of slower economic growth where customers have
a less amount of optional income their ability of expenses
in the industry will be reduced. In times of a wealthy
economy, customers might spend more money on the
industry. This provides customers a high power of
bargaining in the industry of movie because they can
decide to use their entertainment money on alternative
services or products.
e) Bargaining Power of Suppliers
Netflix is completely dependent on studios for the
content they require to provide to customers. Currently,
Netflix does not create any of their own content, if the
suppliers were to stop the sharing of their content to
Netflix, it might cripple business model of Netflix. This
provides the suppliers extreme power over contract
negotiations with Netflix for content acquisition.
(Knowledge Wharton, 2009)
4. SWOT analysis
4.1 Firstly: Netflix’s Strengths analysis
ï‚· Competitive “first-mover”:
ï‚· Competitive “first-mover” advantages comprise
identifying strong brand name and knowledge base.
ï‚· Economies of Scale in Netflix’s Business Model:
ï‚· Online flexible infrastructure and interface allows Netflix
to preserve low operating expenditure whilst raising its
subscription base. Netflix’s position in the industry will
rise if movie downloads become the consumption
technique of choice by subscribers. Consequently, because
Netflix’s subscribers increase, will lead to a decrease in
marginal operating costs and increase in profits.
(Amematekpo et al, 2011).
ï‚· Netflix was able to achieve competitive advantages by
offering low price, free shipping, large selection, and no
late fee policy. This improves the levels of consumer
satisfaction and referrals.
ï‚· Netflix’s Market Power:
ï‚· Netflix has been gaining control of a large area of the
online DVD rental market and as a pioneer in this
industry, Netflix has become a household brand.
ï‚· Electronic-commerce Expertise
ï‚· Expertise of Electronic-commerce including proprietary
“Cinematch” software movie referral.
ï‚· Value in Netflix’s consumer Services:
ï‚· Netflix presents a dedicated DVD recommendation
facility based on the assessments and viewed films by its
previously subscribers. These recommendations coupled
with Netflix‟s extensive DVD inventory enable consumers
to discover beyond the video content of the prevailing
video feature films. The service is proprietary and unique
to Netflix services.
ï‚· Library Content and Large DVD catalog:
ï‚· Currently, Netflix has a large, video content library.
Netflix has more than 100,000 titles and 72 million discs,
this including; TV shows, vague movies, and new
releases. (Netflix, 2009)
ï‚· Experience and Skills:
 Netflix‟s employees have a passion for movies which
would translate to a positive work ethic.
4.2 Secondly: Netflix’s Weaknesses analysis:
ï‚· Financial Resources:
ï‚· Small Financial resources compared to competitors like
Blockbuster.
ï‚· Consumers have to wait at least one or two days to obtain
their films.
ï‚· Lack of Diversification of the world:
ï‚· Despite of that fact that Netflix present its services across
the U.S and some other countries, Netflix has not
expanded outside those few countries, which makes
Netflix to depend on one or few markets. The
globalization can benefit the Netflix’s business by
increased opportunities for growth and strength.
Paper ID: 22031503 2272
International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Index Copernicus Value (2013): 6.14 | Impact Factor (2013): 4.438
Volume 4 Issue 3, March 2015
www.ijsr.net
Licensed Under Creative Commons Attribution CC BY
ï‚· Dependent on USPS as subject to postage increases,
distribution channel to forward.
ï‚· Subject to technological change.
 Netflix‟s product based on its services to their subscribers,
this means that the Netflix‟s strength and growth will
depend on the high Average Revenue per User, low
Subscriber Acquisition Costs, and maintaining low churn
rate. These issues might be difficult to control due to the
absence of transition costs in the video entertainment
industry.
ï‚· Netflix’s brand Loyalty:
ï‚· Netflix’s brand loyalty is not that great, while it has a high
level of brand recognition. In 2011, a series of corporate
missteps caused the firm to lose more than 800,000
consumers. (Amematekpo et al, 2011).
4.3 Thirdly: Netflix’s Opportunity analysis:
ï‚· Netflix’s Potential Growth of Subscription:
ï‚· The industry of DVD rental grosses every year, and
Netflix might tap into this growing and Expansion into
markets.
ï‚· Expansion of movie download ability.
ï‚· Continued international expansion of DVD internet
access, acceptance of e-commerce and component sales.
ï‚· A small meteor crashes into Blockbuster Corporate
Headquarters
ï‚· Digital Distribution:
ï‚· As video content’s digital distribution turn into a
progressively more popular viewing format, Netflix
strategically located to provide as a connection throughout
the slow changeover from physical DVD system to digital
streaming. Netflix is improving it’s located in this position
than other companies because Netflix has an Electronic
Commerce brand name and business model.
4.4 Fourthly: Netflix’s Threats Analysis
ï‚· Extremely Competitive Market:
The industry of DVD video covers a wide range of
viewing prices, technologies, and services. There are some
competitors that might potentially present home video
cheaper than Netflix. If those competitors emerge with a
better streaming ability and lower prices, Netflix‟s
business model might be severely compromised.
(Amematekpo et al, 2011).
ï‚· Changeable Video Rental Industry:
The industry is constantly developing due to formatting
and technological innovations. Prices, goods, and
customer preferences are subject to rapid change, creating
irregular and changeable markets where new competitor
usually a threat and an impressionable business model is
necessary to achieve.
ï‚· Subject to direct assault by deep-pocket of Netflix’s rivals,
such as subscription products presented by
blockbuster.com.
References
[1] Amematekpo, O., Moreno, O., Pruneda, T., Runnion, B.,
and Troester J. (2011) Netflix. Northern Illinois
University.
[2] Fritz, B. (2009) Warner Bros. takes aim at Netflix along
with Redbox. The Los Angeles Times Business. August
13.
[3] [email protected] (2009) Netflix: One Eye on the
Present and Another on the Future. October, 28.
http://knowledge.wharton.upenn.edu/article.cfm?articleid
=2367
[4] MSNBC (2009). Netflix third quarter earnings climb 48
percent.
http://www.msnbc.msn.com/id/33437851/ns/businessearnings#.UKfVZ4ee9Ds.
[5] Netflix, 10K (2009) Netflix’ Business.:
http://yahoo.brand.edgaronline.com/EFX_dll/EDGARpro.dll?FetchFilingHtmlSe
ction1?SectionID=6437838-11995-
40032&SessionID=J97vWSP2nUKf302
[6] Rothaermel, F. (2012) Strategic Management: Concepts
and Cases. New York: McGraw-Hill.
Paper ID: 22031503 2273
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