netflixin 2012. can it recover from its strategy missteps
Porter`s Five Forces model isused to determine the strength of competitiveness of industries.Netflix like any other company faces these forces in the Movie Rental/ Online Video Industry. The intensity of rivalry is considered to bea strong to fierce competitive force in this industry.
Complete an analysis ofthe Intensityof Rivalryby identifying the factors that act to both intensify and/or weakenthe threat thereby demonstrating why it is considered a strong tofierce competitive force.
The intensity of rivalry in the movie streaming and renting businessis fierce. This is caused in part by high buyer`s bargaining power.Switching costs between different brands is low meaning they can actas substitute one another.
The players have chosen to differentiate their products which havevery little room of maneuver. The common suppliers in the name ofstudio houses such as Sony Pictures, HBO, Universal., Time warnerbros and others can supply similar a product through various playerswhere none of the players has exclusive distribution rights. Thismeans that subscribers can access the same product from any of theplayers in the industry. Differentiation is thus pursued throughpricing, marketing, quality, and services that accompany the product.Netflix tends to use low cost pricing to reach out to a larger marketwhile HBO uses exclusive rights to content to increase quality at ahigher price.
Low barriers of entry such as low costs of setting up firms areencouraging new entrants thus intensifying competition.
Rapid technology growth and technology acceptance lead to growth inthe market of content streaming and renting. Actual DVD stores andDVDs are being slowly phased out by the more convenient streaming.Furthermore, streaming is more applicable in a wide range of devicessuch as mobile phones and tablets unlike DVDS. Technology thusexpands market easing intensity of rivalry.
Porter`s Five Forces model is used to determine the strength of competitiveness of industries. Netflix like any other company faces these forces in the Movie Rental / Online Video industry. The threat of new entrants, the bargaining power of suppliers and the bargaining power of buyers all vary in strength in this industry.
Selectoneof these three forces, determine its strength and support thatdecision with an analysis of the force as it relates to Netflix andthe Movie Rental / Online Video industry.
Bargaining power of buyers. Subscribers wield medium to highbargaining power over sellers. This is because they have lowswitching costs and hence can use that as a bargaining chip. This isevident in the attempt by Hastings to split the firm and introduceQwikster website to serve DVD by mail rentals separate fromStreaming. The proposal to do so saw thousands of buyers unsubscribedfrom the service forcing the firm to abandon such plans. Another waythat buyers bargaining power is displayed pertains to the move todemand for content through subscriber reviews. It has been shown thatbuyers rely heavily on fellow buyer reviews before making a purchasedecision. However, this largely affects pay-per-view content whichNetflix is yet to start offering. For pay-per-view buyers, userreviews are very important in making the all-important purchasedecision. This also applies to the DVD by mail subscription. Buyersbargaining power is also responsible for driving down costs and theintroduction of free to view websites. This model was pursued by Huluin the initial stages but failed. The same channel of free to viewcontent is pursued by Youtube and others which generate revenue fromadverts posed on the content and the sites. In contrast, otherplayers content does not include adverts.
What are the Key Success factors (KSF) that will determine Netflix`s and/or other movie rental companies` success in this industry in the next 3-5 years?
Identify a minimum of 5KSFs and support each with a brief discussion.
Organizational economies of scale. The ability of Netflix to maintaina huge number of subscribers will be vital. This is because the firmhas a low profit margin and therefore requires millions ofsubscribers to break even.
Price. As Netflix learned the hard way, price, convenience and easeof use are very sensitive issues in the industry. Only a few Netflixsubscribers are willing to pay a premium price for highly priced butmore recently released content. Netflix and other players mustdevelop new strategies to encourage consumers to spend more withoutaltering their product offering or changing what subscribersassociate with the brand.
Downloaded content. Some players in the industry such as movielinkand a series of illegal download sites offer actual movie downloadsas opposed to streaming. This has the ability to attract subscribersor consumers who would like to store and access the content at alater date where there is no highspeed internet available and no DVDplayers available. The best option for players such as Netflix is tooffer alternative channels that do not over rely on internetconnection and speed.
Continued technology advancement in term of highspeed internetpenetration to drive sale in international markets. Majority ofinternational markets are served by pirated content. Players canreach these markets if the markets have highspeed internetconnection.
Piracy. This can be tackled through appropriate government policiesthat take down websites and channels that promote piracy whichviolates intellectual property rights.
Resource Based View (RBV) andValue Chain analyses are tools that we use to conduct an internalanalysis with the intention of identifying the company`s overallattractiveness and competitive positioning.
Identify a minimum of 5resource strengths and/or competitive assets (S) and a minimum of 3resource weaknesses and/or competitive liabilities (W) for Netflix.
In your discussion ofNetflix`s resource strengths identify which ones may qualify as corecompetencies.
#5 Macro-Environmental analysis (PEST) and Competitive Analysis (5Forces) are analytical tools that we use to conduct an externalanalysis with the intention of identifying the opportunities (O) forthe company and potential threats (T) to its` competitiveness.
Identify a minimum of 2 opportunites (O) and a minimum of 4external threats (T) for Netflix.
VOD is an opportunity that Netflix has not explored. This fieldoffers a very promising growth opportunity where it can offer VOD ofrecently released content at a premium price. This will increase thefirm`s revenues and profits.
scrapping or reorganizing DVD subscription by mail offers Netflix ahuge opportunity to cut down on its costs as the delivery system inby mail costs $1 compared to $0.05 when streamed.
Pirated illegal downloads decrease Netflix`s market and the that ifthe industry at large
Increased competition and rivalry amongst players is affecting profitmargins and market share for Netflix. This is complicated by lowbarriers to market entry which is encouraging more players to jointhe industry.
Free online content is growing from Youtube and such website whichare eating into the market and driving down costs
High bargaining power of suppliers is driving up costs because theyare pushing for higher license fees which is not sustainable forNetflix and its competitors
Established cable channels are likely to move into VOD market tocapture the growing market and in effect reduce the market forNetflix
Inability to manufacture its own content. HBO`s, which also competeswith Netflix, manufactures its content and has been able to surpassNetflix in subscriber numbers through this. Netflix can grow itssubscription more if only it can manufacture content.
#6 Most companies adopt one of the 5 generic strategies and aligntheir strategic objectives / activities with this strategy to achievecompetitive advantage. What generic strategy most closelyapproximates the competitive approach Netflix is employing? Identifyand discuss the core activities that support this choice of strategy.
Netflix uses a low cost/broad differentiation strategy. This isevident in the manner pricing strategy that the firm uses whichinvolved charging less than eight dollars monthly for unlimitedcontent. Unfortunately, this bars the firm from distributing highvalue content comprising of recently released content. The movetowards online streaming of movies not only increased Netflix`smarket reach but also reduces cost. The cost of posting by mail wherea return envelope is included increases the cost to Netflix.
Differentiation is achieved through offering relating old content ata lower price. This is achieved by providing a healthy product mixthat included streamed content that is also available by DVD fromsubscription by mail. Distributing DVDs by mail increases convenienceto subscribers as opposed to physically driving to DVD stores as isrequired for Blockbuster subscribers. The broad range of customerstargeted also show that Netflix does not focus of a narrow marketsegment. DVDs, blue ray discs as well as streaming content ondifferent types of devices enable the company to meet the needs of adiverse market. Consumer reviews provided by subscribers are used ingrouping consumers further. Where subscribers offer near-similarreview on several films or TV programs, the firm loosely categorizesthem as sharing a common taste. Such information is used in marketingand also making content suggestions to subscribers.
Performance analysis is a toolthat we use to examine a company`s financial situation. Conduct anappraisal of Netflix`s operating and financial performance based onthe data in Exhibits 2, 3 and 4 and answer the following questions:
What positives andnegatives do you see in Netflix`s performance?
How well is the companydoing financially?