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 industry, which is on a transition phase from DVD and blue ray tostreaming, has attracted many players. This large number of playersthat include Blockbuster, Youtube, HBO, Amazon among others competefor loosely the same clientèle. They therefore structure theorganization, strategy, product and marketing to attract a largershare of the market than their competitors.
The devices for streaming are increasing by the day to include mobilephones, tablets, game consoles, computers and computer enabled amongothers. This shift to streaming is a response to a declining marketfor DVD rentals being taken by cable TV that provide pay per viewservices for movies. This substitutability of these products meansthat the intensity of rivalry is high. Other factors that lead to ahigh intensity of rivalry in the industry include low entry barriersthat have seen new players enter the industry with a few leaving dueto high exit costs.
There is poor differentiation in the products offered. The contentsupplied by Netflix can be accessed through other competitors. Forrental DVDs, the only differentiation is the minor of delivery,either by mail or by picking from a store. For content streaming,differentiation is minimal as the content titles can be accessed froma range of suppliers. This low differentiation capability in theindustry means  there is high intensity of rivalry as playersseek to be unique in their own way.
Porter`sFive Forces model is used to determine the strength ofcompetitiveness of industries. Netflix like any other company facesthese forces in the Movie Rental / Online Video industry. The threatof new entrants, the bargaining power of suppliers and the bargainingpower 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.
Threat of substitutes
Due to low product differentiation in the industry, majority of theproducts offered are near-perfect to perfect substitutes. Forinstance for Netflix, mass subscription has been the mainstay of theorganization that enables to remain profitable. However, HBO hasmastered mass subscription to be available in 141 countries as of2014 compared to Netflix`s 40 countries. Majority of these new HBOconsumers were Netflix subscribers.
Substitution of Netflix product offering is being presented by freecontent on a range of websites such as Youtube. These free sites earntheir revenue by selling advertising time in the content. In mostcases, such content is old to reduce costs, same way as contentoffered at Netflix. While Netflix uses low charges for revenue andfree content websites utilize advertising for revenue, the content isvery similar. For price sensitive shoppers, they are willing toforego convenience of no adverts for low charges or the inconvenienceof adverts at no cost at all. What this means is that productdifferentiation is low and the products served are near perfectsubstitutes. Additionally, the rental video games that Neflixoffer to its subscribers can be easily for a fee of freely from someof the main game developers and console retailers such as Sony. Thismeans that where firms integrate vertically, Netflix and othercompeting firms will be driven out of business.
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.
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.
Huge subscriber base close to 50 million (May 2014) This allows thefirm a high revenue and profits and generally benefit from economiesof scale.
Strong brand name that has been developed through years of success inthe industry and through market pioneer benefits. In fact, Netflix isused as the benchmark in the movie rental/streaming business.
Availability of content in nearly all Internet-enabled devicesincreases the market reach.
Strong technological capability allow the organization to maintainhigh quality video streaming in all markets. this if furthersupported by a simplified user interface on the website that enablessubscribers to easily choose their content.
Convenient and simplified delivery of DVD and blue ray rentals bymail all over the US. Strategic location of stores make it possibleto deliver unlimited subscription at least in a single day.
Growing global presence which spreads risk and increases contentoffering and increases the opportunities for a richer content
Inability to increase costs for fear of subscriber reactions afterprevious attempts drew sharp negative reaction by industry analysts,investors and subscribers
Loss of market share through falling DVD subscriptions as a result oftechnology shift
Lack of original content which ties the firm to third partymanufacturers
Brand is associated with old content in a highly individualized northAmerican society
Over reliance on ISP`s
#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.
Decline in the use of DVDs offer the organization the chance toreduce its costs and also increase its streaming market in the US.
Expanding international markets especially in Europe where there ishigh highspeed Internet penetration and the brand is slowly gainingrecognition and equity. This offers the firm a better position tocompete against HBO which controls a larger share of theinternational market with a presence in over 150 countries.
Creating own original content and integrate fully. This verticalintegration can be achieved through merger and acquisition oralliances. Creating original content will increase revenue streamsfor the organization as it can market such content to othercompetitors.
Inflated content prices. Players in the industry have had to contendwith inflated prices by content manufacturers as earnings from cinematheaters and DVD sales decline.
Competition from existing players such as Redbox, Blockbuster andAmazon who offer the same content and use the same distributionchannel.
Shift in technology from DVD and blue ray to streaming these byterming investment in DVD distribution redundant.
Increased availability of free content from the Internet and freeviewing offers made by cable television service providers.
Increased availability and popularity of free video torrentswebsites that encourage users to share files. This way, consumersalso turn into competition through sharing these files.
#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.
From the pricing strategy adapted and the approach in the market,Netflix uses a low cost and broad differentiation strategy. Thisentails maintaining a low profit margin to achieve low prices andgrow revenue through increased subscriptions. In order to achievethese low prices, Netflix capitalizes on the economies of scale byserving a huge subscriber base. Currently there are close to 50million subscribers. Secondly, low prices are achieved by streamingand renting out older content. New content, which could be weeks ormonths after initial release, attracts higher license fees ascompared to older content. Other players such as HBO rely on premiumprices for relatively newer content.
The firm does not focus on any particular market segment butaddresses large loosely identified groups. They include the two maingroups of DVD rentals and streaming subscribers. The DVD subscriberscan be geographically grouped according to closest stores same asstreaming subscribers. Another way that Netflix differentiates itsproducts and content offering is through the expressed tastes andpreferences of subscribers through their shared customer reviews. theorganization also uses there reviews in updating its databases andalso for recommending content to consumers. Another minorclassification comprises of video games on DVDs and subscription.
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?