Netflix: Strategy Report

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 Netflix’s performance has been effective in the international market, which finds reflection in over eight million new paid subscribers globally, new projects, including Oscar-nominated movies, and the extremely positive results of employee happiness research.² However, the strong performance of Disney+ did not allow Netflix to reach its goals related to further growth in the U.S.³

Strategic Posture

• Mission: Netflix provides customers with access to TV shows, movies, and other entertainment products.
• 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.⁴ The objectives seem to correspond to the company’s mission and its current values and priorities.
• 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).⁵ The strategies are aimed at improving the quality of products and developing globally.
• 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.⁶ Netflix regulations cover the most important aspects of the company’s business and comply with its main goal, objectives, and environment.

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 of 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).⁷ 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 (education: B.A. in Mathematics, M.S. in Computer Science). He got the position due to being one of the originators of Netflix.
• David Hyman is the Chief Legal Officer with experience of work as a senior corporate counsel (Education: B.A. and J.D. degrees in Law). Hyman got the position eighteen years ago due to being a qualified expert in legal matters.
• Jackie Lee-Joe, the Chief Marketing Officer, has more than twenty years of marketing experience (Education: graduate degrees in Communications). She got the position in 2019 thanks to her extensive professional experience.
• Jessica Niel is the Chief Talent Officer responsible for careers in the engineering department (Education: B.A. in Visual Arts). She rejoined the organization in 2017.
• Spencer Neumann is the Chief Financial Officer with the experience of working in the Walt Disney Company (Education: B.A. and M.B.A. degrees from Harvard University)⁸. He got the position in 2019.

External Environment: Opportunities and Threats

Societal Environment

• Economical trends:
  • There is increasing financialization in the sphere of media and entertainment.⁹ 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.¹⁰
• Technological trends:
  • Cable and data providers control distribution; therefore, collaboration with such companies is the opportunity to succeed.¹¹
  • Netflix personalizes services by using recommendation systems that analyze subscribers’ preferences.
• 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.¹²
  • Some countries, such as China, have rules to ban foreign content.
• 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.¹³

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 the threat of new entrants is insignificant – the majority of Netflix’s competitors have already launched media streaming services (Disney, Apple, etc.), whereas smaller companies will face extremely high barriers to entry.

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 (strong competitiveness – 4)

Netflix competitors are other big companies like Disney + and Amazon, providing access to movies and TV shows. Netflix remains very competitive in terms of product selection and prices, but its competitors (Amazon, YouTube) already benefit from being multi-sided platforms and connecting sellers to buyers.

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. Among such competitors is Disney with its Disney+ platform.

Opportunities and Threats that are Facing the Organization

The potential opportunities for Netflix include expansion to the remaining Netflix-free places (Crimea, Syria, North Korea), new partnerships with independent content providers, and further diversification by means of new region-specific products in different languages.

The threats of the company include competition, finance, and legal issues, such as regulations to prevent its expansion to China.¹⁴

Table 1. Netflix External Environment.

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.

“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.¹⁸ Both companies are rather developed and successful abroad, which makes them a possible threat.

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 States¹⁹.
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 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 increasing 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 to grow 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 2019.²⁰ The annual increase compared to the last year was 22.02%, with Netflix spending $18.3 billion.²¹
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 in 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.²²

Strategic Alternatives and Recommended Strategy

Strategic Alternatives

The TOWS matrix can assist in identifying strategic alternatives available for Netflix based on transforming the corporation’s current strengths and opportunities into strategies to minimize threats (Table 2).

Table 2. TOWS Analysis

Recommended Strategies

Based on the exploration of internal strategic factors, it is recommended for Netflix to consider becoming a multi-sided platform (MSP). 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 many third parties. 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.²³ Moreover, the company can grow without having to produce or purchase new products, but rather 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 service 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.

Implementation

To implement the MSP approach, Netflix should use the information on its customers’ preferences and tastes to set some selection criteria for independent content sellers to be attracted. Next, Netflix needs to develop additional mechanisms to control the quality of the content uploaded by independent creators. Its content moderation strategy should be stricter than that of YouTube and similar platforms to minimize the risks of reputational losses or legal cases. Building an MSP will be much easier for Netflix than for any smaller business since its brand name minimizes the amount of effort needed to attract sellers and buyers.

Evaluation and Control

Netflix’s enormous customer base and good customer support services can assist the organization in controlling the process of strategy implementation and evaluating the preliminary results. Most importantly, Netflix will be able to use its abundant IT opportunities to launch patient satisfaction survey tools and allow customers to rate content sellers and submit complaints. Therefore, customers’ experiences with the new platform and particular sellers will support mid-term evaluations and improve Netflix’s seller selection practices.

Bibliography

Bylykbashi, K. (2018). Netflix: China expansion unlikely. Web.

Hagiu, A. (2018). The best way for Netflix to keep growing. Harvard Business Review. Web.

Johnson, D. (Ed.). (2018). From networks to Netflix: A guide to changing channels. Routledge.

Legal notices. (2018). Netflix. Web.

Lussier, R.N. (2019). Management fundamentals: Concepts, applications, and skill development. SAGE Publications.

McDonald, K., & Smith-Rowsey, D. (2016). The Netflix effect: Technology and entertainment in the 21st century. Bloomsbury Publishing USA.

Moskowitz, D. (2020). Who are Netflix’s main competitors? Investopedia. Web.

Nayak, R. (2019). Piracy prevails. Harvard Political Review. Web.

Netflix (2019). Q4 2019 financial statements. Web.

Netflix long term debt 2006-2020. NFLX. (2020). Web.

Netflix operating expenses 2006-2020. NFLX. (2020). Web.

Officers & directors. (n.d.) Netflix. Web.

Rodrigues, A. (2020). Netflix crushed growth targets internationally during Q4 but missed in the US, where rivals like Disney Plus emerged. Business Insider. Web.

Statista. (2020). Number of Netflix paying streaming subscribers worldwide from 3rd quarter 2011 to 1st quarter 2020. Web.

Footnotes

1. Netflix. (2019). Q4 2019 financial statements. Web.
2. Rodrigues, A. (2020). Netflix crushed growth targets internationally during Q4 but missed in the US, where rivals like Disney Plus emerged. Business Insider. Web.
3. Rodrigues, A. (2020). Netflix crushed growth targets internationally during Q4 but missed in the US, where rivals like Disney Plus emerged. Business Insider. Web.
4. Lussier, R.N. (2019). Management fundamentals: Concepts, applications, and skill development. SAGE Publications.
5. Lussier, R.N. (2019). Management fundamentals: Concepts, applications, and skill development. SAGE Publications.
6. Legal notices. (2018). Netflix. Web.
7. Officers & directors. (n.d.) Netflix. Web.
8. Officers & directors. (n.d.) Netflix. Web.
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. McDonald, K., & Smith-Rowsey, D. (2016). The Netflix effect: Technology and entertainment in the 21st century. Bloomsbury Publishing USA.
12. McDonald, K., & Smith-Rowsey, D. (2016). The Netflix effect: Technology and entertainment in the 21st century. Bloomsbury Publishing USA.
13. Johnson, D. (Ed.). (2018). From networks to Netflix: A guide to changing channels. Routledge.
14. Bylykbashi, K. (2018). Netflix: China expansion unlikely. Web.
15. Nayak, R. (2019). Piracy prevails. Harvard Political Review. Web.
16. Bylykbashi, K. (2018). Netflix: China expansion unlikely. Web.
17. Rodrigues, A. (2020). Netflix crushed growth targets internationally during Q4 but missed in the US, where rivals like Disney Plus emerged. Business Insider. Web.
18. Moskowitz, D. (2020). Who are Netflix’s main competitors? Investopedia. Web.
19. Statista. (2020). Number of Netflix paying streaming subscribers worldwide from 3rd quarter 2011 to 1st quarter 2020. Web.
20. Netflix operating expenses 2006-2020. NFLX. (2020). Web.
21. Netflix operating expenses 2006-2020. NFLX. (2020). Web.
22. Netflix long term debt 2006-2020. NFLX. (2020). Web.
23. Hagiu, A. (2018). The best way for Netflix to keep growing. Harvard Business Review. Web.