Analysis of Strategy
Analysis of Strategy Netflix
Lauren Lane
Strategy
10.15.12
Netflix
Lauren Lane
Strategy
10.15.12

Netflix was born from an idea in 1997 from Reed Hastings, in conjunction with his partners Marc Randolph and Mitch Lowe. As a company Netflix has derived its profits from a consumer’s ability to stream DVDs online as well as have them delivered to their house, completely remodeling the idea and process of video and television rentals. Netflix created a product that filled the void of instant media access to consumers, and created a product that makes video and television viewing a service that everyone could access and afford. For a monthly subscription fee, subscribers can rent as many DVDs as they would like and keep them for as long as they like while also being able to stream movies and TV shows online, giving them access to hundreds of thousands of options of what they want to watch. There are no due dates or late fees for the DVDs which was a change from the traditional way of movie rentals. 1. Identify the key elements of Netflix’s strategy. What competitive advantages is Netflix trying to achieve?
Netflix created the perfect storm of a company that encompasses and produces a product accessible from multiple different mediums for consumers.
A consumer of Netflix has the ability to keep to a more traditional way and continue to watch DVDs of their favorite movies, keeping to a tradition held in the world for many years. However they added a twist. They not only deliver the DVDs to your home, but they also have free postage to encourage families to send the movie back and order another to continue to repeat the cycle.
Netflix has also cornered the market with video streaming online. Netflix has hundreds of thousands of movie and television options that a Netflix subscriber can chose to stream online all from the comfort of their own home. There is no limit to the amount of movies and TV a person can watch in a day, or a month.
As a company they have targeted using themselves as a distribution channel for their subscribers. They supply us with the access to our favorite movies and TV shows to be able to watch and re-watch them as we please. Because of being under this label they are now in direct competition with mediums such as movie theatres and TV channels. However what puts Netflix at such an advantage is that you have instant access to what you want to watch, with the ability to control it, and how many times you watch it without having to pay more per view. If you enjoy a movie in a movie theatre you have to pay 8-11$ per view of the movie depending on the theatre, which could potentially be up to three months of a Netflix subscription. They have an advantage over TV channels as well. If you want to wait and see a show on TV you have to plan your day around when the show will be on and you will not necessarily be able to rewind the show if you want to re-watch an episode. Netflix gives you the options of rewinding, pausing, and fast forwarding a show that you can watch over and over again for the same price. 2. Analyze the evolution of the US market between 2006 and 2009 and the Netflix subscriber data. Identify 5 to 6 key success factors in this industry.
The US Market for rentals of movie, TV episode sales grew from 2006 to 2008 from $30,737 to $35,391, however it then fell in 2009 to $33,374. If you look at Appendix I in the book, the chart shows the growth and decline set over the years for Netflix. Throughout the years, the number of in-store rentals of DVDs while being able to stream movies and TV show online and renting on VOD (Video on Demand) was increasing. However this number took a downturn when the economic crisis hit in 2008; nonetheless the amount of Netflix subscribers increased. This can be assumed that people were not interested in spending large amounts of money to go out to movies, and were looking for the most affordable option to enhance their leisure time. In appendix II we can see that the number of subscribers increased 1,000,000 to make 3,000,000 total subscribers from the beginning of the year to the end. So despite the crisis DVD rentals and online streaming still became an incredibly popular idea.
Key Success Factors:
The six key factors to producing success in the movie and TV rental business include wide-selection of movies and TV titles to choose from, convenience in locating and renting the movies and TV episodes, convenience of returning the rental, ability to stream movies and TV episodes instantly online or from any internet accessible console, extensive information provided about each movie and TV episodes which includes reviews, trailers, and ratings, and finally the ability to create a policy including no late fees and no due dates which results in a hassle-free system for both the company and the subscriber. Netflix incorporates all six of the above listed factors into their strategy. They have provided their consumers with a wide selection of movies, TV episodes that are attached with reviews and ratings. Another big key factor for Netflix is the fact that they have no late fees or due dates allowing the subscriber to rent a movie and decide when and how many times they want to watch a movie or TV series. All of these key factors play a large part in how successful Netflix is and how they are growing and expanding so rapidly while also maintaining and building a higher brand image and name. 3. Conduct a five-forces analysis of the movie rental marketplace and define how strong each competitive force is.

Suppliers:
There are two main suppliers for Netflix; film companies and shipping. For film companies Netflix is provided by the film and TV companies with not only their movies and TV but also the rights to play and distribute their produced media. Some examples of Netflix’s movie and TV suppliers are Paramount Pictures, MGM, Lions Gate Entertainment, Time Warner, Sony Pictures, Disney, and NBC Universal. These big names in film creation and distribution supply Netflix with a high volume of the DVD and TV titles that are available for both rental and online streaming. Without these companies, Netflix would have no product to market and distribute. The US Postal Service is also a big supplier for Netflix. Netflix also does not charge its subscribers for shipping, instead they chose to encourage consumers to keep sending and requesting DVDs by spending close to three billion dollars per year on shipping costs alone. Without the postal service Netflix would not have an ability to spread their movies as quickly and efficiently as they do currently. Medium.
Buyers:
The main buyer of the Netflix brand and their end product is the general public. Anyone who wishes to have a flexible time ability to watch a movie and return it as they please, or anyone who wishes to instead stream media straight into their homes from the Netflix website. High.
Substitutes:
Movies and TV, while a very popular leisure activity, can easily be replaced by other forms of media such as books or magazines. Over the past five to ten years there has also been an increase in video games and video games being chosen as a leisure activity as well as those who chose to spend their time browsing on the internet as well. Just like the increase in video games there has been an evident increase in social networking and the use of social media. These are all possible substitutes for watching a movie or TV show. Medium.
Competition:
There are multiple competitors of Netflix. The first, DVD movie and TV show rental. This competitor type is already very established in society with companies like Blockbuster and Red Box. Both Blockbuster let you rent actual DVDs to enjoy in your home, as well as Blockbuster has an online streaming feature just like Netflix. If we ignore the rental part of Netflix’s company and focus on the streaming abilities that it offers we open a larger competition pool. YouTube, Hulu, and Amazon all offer this same ability. These examples can face strong competition from these companies because certain amounts of their titles are streamed for free, something Netflix does not supply. Medium to High.
Barriers to entry:
While there are multiple factors that go into creating a successful online business, entry in this business is not difficult or restricted. Even small entrants, can build a large DVD library and make their investments in small manageable portions. The only high restriction for this type of business is distribution laws and having to obtain an agreement to be able to distribute movies and TV shows. Low to Medium. 4. What forces are driving changes in the movie rental industry? Are these driving forces likely to be favorable or unfavorable in term of their effects on competitive intensity and future industry profitability? Why?
The driving changes of the industry are both the buyers and the competition for Netflix. For the buyers, there is a lot of competitive pressure on the industry since can be difficult to define the current wants and needs of those who subscribe to Netflix. This makes pleasing the overall population, and maintaining steady revenue, tricky sometimes. The second driving force and change is competition. This is because any company or organization can decide to enter the DVD movie and TV rental business. All one would have to do is get the technology and the rights to distribute and sell the titles from the studios that produce the target media.
These forces are advantageous for the competitive intensity of the industry, however it can be potentially harmful for the industry profitability. This is because the barriers to enter are so low, therefore, as stated before, anyone can enter the rental arena and challenge Netflix for the top position in DVD rentals. Future profits might suffer because as there are more companies, the more spread out the profits will be. 5. Develop a strategic group map of the movie rental industry (Netflix, Blockbuster, Redbox, and VOD providers as a group). How attractively is Netflix positioned on the map? Explain.

Netflix:
PP – 3.5 P/SQ – 3.5
Blockbuster:
PP – 2.2 P/SQ- 3
Red Box: PP-2.5
P/SQ-2.8
VOD: PP-2.2 P/SQ-3

Netflix is positioned at the highest point based on their pricing policy and the product and service quality that they provide. Since they provide their subscribers with unlimited access to hundreds of titles streaming online and one DVD per month for $8.99 they have the best pricing policy per title option. With both Blockbuster and Video on Demand (VOD) you have to pay an upfront monthly fee, just like Netflix, however you have to also pay to rent or purchase the videos you want to watch. They charge more for a service that gives you fewer options. With Red Box it is based individually on the movies you rent. You have 24 hours with a movie and only pay a dollar. The price you pay is based only on how many movies you rent out and how long you keep the movie. For quality of the product that is provided Netflix, Blockbuster, and VOD all give you options for high definition movies, while Red Box does not. 6. What is your appraisal of Netflix financial performance based on the data in case Exhibits 2, 3, and 4? (Limit your analysis and comments to not more than six key ratios). What positives and challenges do you see in Netflix’s financial performance?
As we can see in Appendix III, Netflix has been showing a great performance over the years. The revenue has been increasing each year from $996.7 million in 2006 to $1,760.3 million in 2009 as well as the net income, which has been increasing each year from $49.1 million in 2006 to $115.9 million in 2009. However, while the revenue and net income have been increasing every year and has maintained a certain level of stability, the growth rate is not very stable. It has been seen to rise and fall every year, creating a level of instability for the company. Finally, we can see that in the profitability category has remained in the single digits with profits growing only from 4.93% to 6.94% from 2006 to 2009. This does show to us as consumers that Netflix’s financial strategy has been growing and evolving at a positive rate over the years.
Netflix’s cost of goods sold (COGS) ranges from $932.3 million to $1,478.4 million between the 2006 and 2009 years. This is good because it shows a strong relationship correlation between the more operating costs and the more subscribers to Netflix. The more they spend to make Netflix efficient and appealing to the consumers, the more subscribers Netflix gains. From the text we can see that the revenue percent fell over the 2006-2009 years from 94% to 89%. This is because of the amount of goods sold in those years. Unfortunately for Netflix, can mean that they are currently unable financially to expand and handle the rapid growth that they’re currently undergoing.
From 2006 to 2009, Return on Equity (ROE) increased from 12% in 2006 to 58% in 2009 showing that Netflix is getting their money’s worth from the stock the company invested in. Return on Assets (ROA) is increasing over the years as well, from 8% to 17% in 2009 which means that Netflix has maintained their assets and continued to use them affectively to generate positive revenue.
On an overall scale one can see that Netflix is performing very well and will be sustainable in the future. The only challenge that Netflix will surely face is expanding at a rate that will not overwhelm them as a business. 7. Conduct a SWOT analysis of Netflix. How attractive is Netflix overall situation?
Strengths:
Netflix has four main strengths; their relationships with the studios that provide them with their distributed media, their strong brand recognition, personalized recommendation services, and new pricing strategies. Netflix has developed strategic and close relationships with movie and TV show studios over the years which help create the basis and stock their extensive library of titles. Without these bonds from company to company there would be no media for Netflix to distribute in a legal fashion. Netflix also has a very recognizable brand. It is one of the most popular companies in the US and is the largest online subscription streaming and DVD rentals. Another feature Netflix utilizes is recommendation technology that is based on user ratings of titles they have seen. Thus every customer can receive a personalized computer-generated recommendation for a next film or TV show that seems to be of interest to them based on their previous selections and individual ratings. “Flat monthly fee, no late fees” is how Netflix markets their costs. There is a monthly fee that varies based on the package you, as a subscriber, chooses. On top of having low monthly prices there are no shipping fees or late fees. They market that the price you pay is everything you will pay, no hidden fees or attachments. After Netflix has had success with this pricing model, other businesses such as Blockbuster and Hulu have adapted it for their own use.
Weaknesses:
Netflix has two main weaknesses that effect and can even dictate what and how they do things as a company. While the ratings are helpful because they can create a personalized recommendation for a Netflix subscriber, if a viewer continually gives media they view negative ratings their recommendations will be skewed and will not appeal to the consumer. Another major weakness is the control studios have over releases of movies and TV shows on Netflix. Netflix can rent out the DVDs only once they are out in the market which is a decision made by movie studios and their distributors putting these decisions outside the control of Netflix.
Opportunities:
Netflix has opportunity that basic DVD rental businesses do not - they stream movies as well as mail them to customers covering both needs. DVDs are the most prominent form of media for watching movies, which has been seen and used by Netflix to build their brand. Moving forward they have opportunities to start partnering with more film studios to bring even more titles to their subscribers, as well as move into video game distribution to be able to target and acquire an even larger audience.

Threats
As previously mentioned, Netflix is prey to fluctuations in supplier policies specifically prices and release dates. USPS and film studios can increase their prices, which will directly affect the cost to maintain their current strategy and the speed of their current turnaround of movies and TV shows. Another big threat to Netflix is the idea of studios forming alliances with other companies like Netflix. As competition in the new version of DVD rentals gets even more intense and populated, studios might decide it more beneficial for them as a company to form alliances with others such as Blockbuster, Amazon, Red Box, and Wal-Mart. If this were to happen it would worsen the competitive advantage that Netflix currently holds.
At the current stage Netflix is in they have a very attractive overall situation. Their strengths and opportunities heavily outweigh their threats and weaknesses even looking into the future. I don’t believe that they are in any immediate danger of being beaten out by a competitor because of their strengths, relationships, strategy plan, and strong brand recognition within the population. 8. Conduct an un-weighted competitive strength assessment comparing Netflix, Blockbuster and the VOD providers as a group, using the methodology presented in Table 4.4 of Chapter 4 and the 5 KSF’s you identified above. How does Netflix’s competitive strength compare against that of Blockbuster and rival VOD providers?

Un-weighted Competitive Strength Assessment | | | | Netflix | Blockbuster | VOD | | Importance Weight | Strength Rating | Strength Rating | Strength Rating | Quality | 15.00 | 14 | 13 | 15 | Price | 15.00 | 15 | 10 | 10 | Reputation | 5.00 | 4 | 3 | 4 | Distribution | 10.00 | 10 | 7 | 9 | Packaging | 10.00 | 9 | 9 | n/a | Technology | 5.00 | 4 | 3 | 5 | Marketing | 15.00 | 13 | 10 | 10 | Network | 5.00 | 4 | 3 | 4 | Customer Service | 15.00 | 15 | 13 | 13 | Innovation | 5.00 | 5 | 4 | 5 | | | | | | Overall Rating | 100.00 | 93.00 | 75.00 | 75.00 |
Netflix has the highest overall rating in comparison to Blockbuster and VOD both ranked at 75. Each company has a high quality rating, high customer service ratings, and good innovation ratings but there are definitely differences between the three companies as well. Netflix has the cheapest prices in comparison to Blockbuster and VOD because of their flat monthly rate and the addition of a fee to rent each movie. This gave Netflix the edge over them both for the best price rating. Distribution was also the highest for Netflix. You can access the movies online with streaming as well as getting the DVDs in the mail. This is important and puts them at an advantage over Blockbuster and VOD because with Blockbuster you can only order the movies or go into the store and get them, and for VOD you have to rent them on your TV. Marketing is at 13 for Netflix because they have the most advertisements out both online, and on TV. However for both Blockbuster and VOD you rarely see advertisements for these two individual product lines. Overall the three companies have strengths and weaknesses. They have areas that they are excelling in as well as areas that they need improvements in for the future.
9. Are you satisfied with Netflix’s overall performance? Do you have any concerns? What 2-3 top challenges and priority issues does Netflix management need to address?
As of Netflix’s current status, yes I am satisfied by their overall performance. They have a solid idea, with a wide market that has no signs of dying out over the foreseeable future, and strong relationships with their suppliers and buyers to maintain themselves as a profitable company. The only concern I can see for them is incoming competitors trying to take their competitive edge. The DVD rental business is very easy to gain access to, so the chance of competition is high and the barriers to enter are low.
I believe that Netflix should focus on combining the titles in which people can stream online and the ones that they can rent in the mail. There are certain movie and TV options that you can only view if you rent them, which can be inconvenient for those who are interested only in streaming videos, not paying for the extra features. This would be a new way to attract more subscribers, and a new way to market their product. Another priority is expanding into video games as well. Adding another market to advertise to will open up for more profits and consumer markets for Netflix to take advantage of. There is no main supplier of video games that runs their company in the same way Netflix does, so this would provide a service to a human un met need, just as Netflix did with their original movie rentals. 10. What recommendations would you make to Netflix CEO to insure it meets its objectives in the future and to address the top challenges and issues identified in question 9.
After thinking about the challenges Netflix should focus on I would recommend that they focus on gaining even more control over the movies that are released from the studios. They should focus on getting more and quicker access to new movies in HD rather than providing so many older movies from years ago. I believe that this will help gain more subscribers as well as increase profits because more people will be drawn to getting to see new movies earlier. The second recommendation is to focus on expanding towards more and newer technology. Netflix in the past two years has created an app for your iPhone, iTouch, and iPad which makes watching and accessing Netflix on the go possible. Now if people are on a long trip they can entertain themselves by watching their favorite movies or TV shows. More they could do with thisis create an app for non-Apple smart phones such as Androids and Windows. This would give them even more of a target audience for them to market to and advertise about. Finally, they can start having selections of DVDs that can be rented for Blue Ray players instead of just basic DVD players. This would target those consumers that are continually purchasing the newest technology and appease them. This will also help their revenues because those who wish to rent DVDs but don’t want the basic DVDs to play on their Blue Ray player or Blue Ray TV will now be able to easily through Netflix.