Executive Summary
Netflix is an industry leader for movie rentals and online streaming. Netflix’s history goes back to 1999 when Reed Hastings founded the DVD rental company at the time when DVDs were not accessible. Netflix started with a free one-month free trial, and 80% of the customers renewed their subscription. Since then, Netflix’s membership has grown substantially. In February 2002, Netflix achieved the milestone of attaining 500,000 subscribers, and by 2010, Netflix had over 23 million subscribers (Gurel & Tat, 2017). Netflix builds its success on early strategy, optimizing distribution, and its strategic model. However, there are many competitors in the industry, including Amazon Prime, Hulu Plus, YouTube, and HBO Go. The case study identifies increasing competition as the biggest issue for Netflix and identifies new strategies that Netflix can implement to stay ahead of the competition.
Situation Analysis
The case study gives a detailed account of Netflix’s internal and external environment. Netflix grew drastically by taking advantage of opportunities in the industry despite the company’s weaknesses. Netflix was founded on an innovative business idea. It came and disrupted the movie renting industry and forced organizations such as Blockbusters out of business. Netflix took advantage of the innovative idea and early entry into the online movie renting business to cement its position in the market. However, Netflix is facing stiff competition from other competitors using Netflix’s business model to gain entry into the movie streaming business (Burroughs, 2015).
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As the competition in the streaming industry increases, Netflix has to seek knowledge about its environment to understand the important variables. As new players enter the market, Netflix’s dominance is challenged, and the organization has to come up with new strategies to deal with competition. A situational analysis entails the strengths, weaknesses, opportunities, and threats of an organization. From the case study, the biggest strength for Netflix is its exponential growth. Since its formation in 1999, Netflix managed to attract many subscribers at a time when streaming technology was still foreign. Netflix attained more than 500,000 subscribers in 2002 and 20 million subscribers in 2010, representing a 63% growth from the 2009 subscribers. As the number of subscribers increased, Netflix’s revenue and profit also increased (Moskowitz, 2019). In 2008, Netflix earned $320 million in quarterly income and $394 million in the first quarter of 2009.
Another strength is that Netflix started going global in 2009 by launching its services in Canada. Netflix now has a global customer base serving over 190 countries across the world (Kovacs & Jansen, 2015). A global customer base gives the company an upper hand when negotiating with studios for exclusive content. From the case study, Netflix is original and highly adaptable. Reed Hastings founded Netflix after predicting that modern technology will disrupt the entertainment industry. Over the years, Netflix experimented with different movie renting methods, pricing strategies, and streaming techniques to remain adaptable and competitive. Netflix allows subscribers to stream movies through their TVs, computers, Ipads, and smartphones; this is an innovation that will continue to grow the business. In 2012, Netflix committed $75-100 million to develop original content to attract and retain new subscribers.
Lastly, Netflix has maintained competitive pricing since 1999 (Adhikari et al., 2012). Netflix charged $19.99 per month for 3 DVDs at a time during its formation years. Netflix also had a cheaper option for the 2 DVDs at a time. Netflix’s competitive pricing has given it an advantage over its competitors. Subscribers now enjoy unlimited movies, either on DVDs or by streaming for an affordable price of $9.99 per month. Netflix is a cheaper option than going to the cinema, and yet it offers a wide selection. The organization also offers premium plans for subscribers who want to access more movies.
Some of the organization’s weaknesses from the case study include limited copyrights, increasing operational costs, and poor strategies that have brought losses to the organization. Netflix does not own most of the content, and it has to make contracts with studious to air the content exclusively to retain subscribers. The contracts with the studios cost money, and they end. For example, in 2011, Starz announced that it would no longer sign programming to Netflix. Fortunately, Netflix made a deal with DreamWorks (Kovacs & Jansen, 2015). The increasing cost of content licensing is not the only cause of increasing operational costs. Netflix has grown exponentially; it is now producing its original content, and this increases the operational cost and risks.
Poor internal strategies, such as the decision to change the business model, affected the company adversely. In 2011, Netflix moved its DVD by mail service to a new subsidiary called Qwikster to focus on the streaming side of the operation. Netflix decided that customers will pay separately for Qwikster and Netflix services. This was not received well by clients who began sending complaints online. Consequently, Netflix lost 405,000 streaming customers, and the share price fell by 26%. It took two years for Netflix to recover from the incident while the competitors took advantage of the incident.
There are opportunities in the market that Netflix can capitalize on. Netflix can continue tapping into the global market to expand its customer based. Netflix can start from countries where it is currently not available. Netflix is not available in China, North Korea, and other countries in Asia. Another opportunity is refreshing its content library. Netflix can pursue contracts with various movie distributors and also refresh its library to add new content. Netflix can also pursue alliances with telecom companies to attract more subscribers. As many players enter the streaming industry, Netflix can take advantage of niche marketing by producing or airing region-specific content in local languages to attract more subscribers. Niche marketing will be successful for new markets such as India that have their original content in other languages.
The biggest threat facing Netflix is competition from other movie streaming companies such as Hulu, Amazon, HBO Go, and YouTube. The competitor base keeps increasing every year, and the competitors have put in place effective strategies to attract new clients. Another threat is strict government regulations when operating in a global market. Different governments have unique restrictions on foreign content, and this can affect Netflix’s operations and membership.
Assumptions and missing information:
The case study gives a brief history of Netflix from 1999 to 2011. The case study fails to include important internal records and financial information, which are a part of the company’s internal environment. A detailed financial record is necessary to gain the full picture of the organization’s sales, profit, and operating budget. Netflix cannot implement new strategies without finances. After the failed business strategy in 2011, Netflix lost many customers and revenue. However, this case study is based on the assumption that Netflix has enough finances to implement new strategies of bringing in more customers and staying ahead of the competition.
Statement of the problem(s)
From the situational analysis, Netflix has significant weaknesses and threats. Internal issues such as the increasing operational costs and licensing costs are some of the problems affecting Netflix. The increasing competition exacerbates internal problems. Netflix is the dominant player, but other competitors are slowly chipping away its customer base.
Alternative Solutions
As the video-streaming industry becomes crowded, Netflix has to come up with new strategies to stay ahead of the competition. As a market leader, Netflix has been in the market for the longest, and it has developed a stable clientele. However, recent players such as Amazon Prime, Apple TV, and Hulu Plus are offering competitive packages to attract new clients.
Netflix can slice its prices to attract more and retain more clients. According to Burroughs (2015), Netflix is under extreme pressure to reduce subscription costs to survive the cutthroat competition. Netflix could probably charge $6.99 a month and still make a profit because of the massive number of subscribers. By charging slightly lower than the competitors, Netflix’s subscribers will welcome this news are likely to remain loyal. Netflix can supplement lost income through commercials. Netflix can offer an ad-supported service for some of its low-priced services. Netflix has been opposed to commercials in the past, but it can make more than $1 billion in ad revenue every year to make up for the reduced subscription rates.
Another alternative is taking advantage of the brand name to increase its global presence while adding more content to its catalog. Most of Netflix’s competitors, such as Apple TV, Hulu, and Amazon, are establishing themselves in the American market because of their late entry into the industry. Netflix is a well-known global brand, and the best way to beat the competition is by venturing into new global markets such as China. To succeed in the global market, Netflix should adopt a differential marketing and pricing strategy. For example, in countries with low Netflix membership, Netflix can reduce the price to attract more subscribers. Netflix can increase the subscription fee in countries like Australia, where a significant number of subscribers are choosing the premium plan.
The last alternative for Netflix to stay ahead of the competition and increase revenue is through partnerships with telecom companies and pay-TV providers. Netflix has to partner with other telecom companies to encourage subscription through offers such as a free one-month subscription to its users. Signing new customers through bundling offers can expand the customer base easily.
Evaluation of alternatives and recommendations
The alternatives have the potential to help Netflix maintain its position as the market leader and increase revenue. The first alternative of reducing the subscription fee will probably be the most popular approach among the subscribers, but it might not be feasible as Netflix is also already struggling with increasing operational cost and debt. A small reduction in the subscription fee might not appeal to customers who have no problem with the price rather than the content. Netflix can choose to reduce subscription fees and offset the cost through adverts. This move will bring more money, but the subscribers who are used to watching movies uninterrupted might opt out to other services that do not have commercials. This strategy can be implemented within a short period of time, a study of the financial implications.
The second alternative of increasing its global presence might help Netflix stay ahead of the competition. Netflix is enjoying a global presence with members from many nations across the globe. Netflix can attempt to enter untapped global markets such as China. The process of entering new markets might be challenging as Netflix has to understand the market needs and come up with appropriate strategies for conquering new markets. Entering global markets takes time, and this strategy should be pursued on a long term basis. It can take years to understand and conquer new markets. The solution calls for structural changes such as adding new departments and hiring new people with knowledge of how the new markets operate.
The third alternative of partnering with telecommunication companies and pay-TV providers is an approach that Netflix is already pursuing. Netflix can stay ahead of the competition by partnering with studios, telecom companies, and pay-Tv providers to get affordable and more content for its subscribers. This is an approach that Netflix is already pursuing, thus implementing it will not be hard. However, it might take a considerable amount of time before Netflix can reach an agreement with some partners. The three alternatives are feasible. However, the third alternative of pursuing partnerships is the best alternative now. Netflix can pursue expansion on a long-term basis, but it will attract more subscribers by partnering with studios and telecom to bring more content at affordable rates.
Evaluation and control:
Netflix will put in place evaluation and control measures after implementing the strategy. Netflix has been relying on measures such as subscription rates, monthly website traffic, and revenue to track its performance. Netflix will use the subscription rate and website traffic statistics before implementing the solution and evaluate it after a year. The ultimate tool for evaluation is revenue, as Netflix is motivated by the need to surpass its financial goals.
References
Adhikari, V. K., Guo, Y., Hao, F., Varvello, M., Hilt, V., Steiner, M., & Zhang, Z. L. (2012, March). Unreeling netflix: Understanding and improving multi-cdn movie delivery. In 2012 Proceedings IEEE INFOCOM (pp. 1620-1628). IEEE.
Burroughs, B. E. (2015). Streaming media: audience and industry shifts in a networked society.
Gürel, E., & Tat, M. (2017). SWOT analysis: A theoretical review. Journal of International Social Research , 10 (51).
Kovacs, G., & Jansen, J. (2015). An Analysis of Strategies by Netflix in the Television Market (Doctoral dissertation, Tesis doctoral. Aarhus University).
Moskowitz, D. (2019, Oct. 28). Who Are Netflix's Main Competitors? Investopedia . Retrieved from: https://www.investopedia.com/articles/markets/051215/who-are-netflixs-main- competitors-nflx.asp
Teece, D. J. (2010). Business models, business strategy and innovation. Long range planning , 43 (2-3), 172-194.
