STRATEGIC MANAGEMENT

STRATEGIC MANAGEMENT

SUBMITTED BY:

NOWSHAD MOURIN SHAWON

NOWSHAD MOURIN SHAWON L0044SZSZ1010 Page 1

Abstract:

Netflix reformulated video rental service through fantastic customer service and forcing of new technology. Netflix is competing with giant competitors in the market. Although outlook of Netflix’s market position is not bad but the overall situation is not satisfactory. Some new competitors are joining in the game; as a result competition is getting difficult. To stay in the role Netflix needs to- (1) be more creative to maintain its advantages, (2) get more subscriber, (3) move fast into new technological model. In this paper, I have discussed Netflix’s background and analyzed it by strategic tools. At the end, I evaluated some taken strategy by Netflix and suggested some recommendation in the conclusion.


Contents

Queue

Description Page No

1 Introduction 42 Company Background 43 Netflix’s Timeline 54 Market Situation 65 Value Chain 66 Position in Value Chain 67 Stock Performance Graph 78 Strategic Analysis 89 Prescriptive Analysis 810 Design School 811 SWOT analysis 812 Planning School 913 Positioning School 914 Five forces Analysis 1015 Descriptive Analysis 1116 The Entrepreneurial School 1117 The Cognitive school 1118 The Learning School 1219 The Power School 1320 The Environmental School 1321 The Culture School 1322 The Configuration School 1323 PEST Analysis 1324 Strategy Taken 1425 Critical Evaluation of Strategic 1526 Conclusion 1627 References 17


Introduction:

E-commerce has done tremendous changes in present lifestyle. Now traditional businesses are also updating them to e-commerce. Video rental services quit new in the business world but it is a great business idea. This paper talks about the competitive strategy of Netflix, an online based DVD Rental Company. Netflix is extremely discussed in media, financial analyses, industry publications and business school literature because of its customer service progress and IPO. This paper also discusses high level collective data & information and uses them as a source for symposium of Netflix’s growth and strategy.

In this statement, the widely admired analytical tools have been used through Mintzberg 10 schools, such as – five forces, SWOT, PEST analysis etc.

Furthermore, in termination some decisions are shown on the basis of present structure of media distribution depends on shifting of audio-visual industry in next 10 to 15 years.

Company Background:

Netflix is an on demand DVD rental, internet streaming provider in USA, United Kingdom, Ireland and Latin America. It is a world leading service provider for enjoying TV programmes and Movie. Netflix established by Reed hasting in august 29, 1997 and started business on April 14 1998. It begins its subscription service in 1999. Headquarter of Netflix Inc in Los Gatos, California. Middle of 2002 Netflix started IPO(Initial public offering). of 5,500,000 shares at $15.00 per share on Nasdaq stock exchange under the ticker “NFLX.” Total Netflix members at the time: 600,000. Netflix reached 857,000 members at the end of 2002. In 2009 Netflix made 4.2 million members. In 2009 Netflix Inc partners with consumer electronics to stream on PS3, internet connected TVs and other internet connected device. Consumer can able to use Netflix services on iPad, iPhone and iPod Touch, the Nintendo , and other internet-connected devices in 2010 and Netflix end the year with 20 million members. In 2011 it extend its service to Latin America and Carrabin. In this year (2012) its starts its service in United Kingdom and Ireland. At present Netflix have over 23 million members in USA, Canada, Latin America, Carrabin, United Kingdom and Ireland. Reed hasting is the co-founder and chief executive officer with 900 staffs.


Netflix’s Timeline:


1997Reed Hasting and Marc Randolph established Netflix.

1999 Started Subscription Service.

2000 Personalised film recommendation services.

2002Makes IPO857,000 members

2003 Members increased by 74 % (1,487,000)

2004Ends the year with 2,610,000 members , up 74% from 2003

2005 increased members by 60 %, 4.2 millions

2006 6.3 millions members

2007 introduce streaming .

2008Partners with consumer electronics companies,streaming on Xbox, blu ray disc players, apple computers.

2009Streming on PS3, internet connected TV and other device.

2010Started in Canada. 20 million members

2011 Service starts in Latin America and caribbean .

2012 Launches in United Kingdom and Ireland.

Market Situation:

The home DVD rental sector in the USA is about $6.8 billion market, with sales producing another $12 billion. The total from rental and sales makes over 45% of film industries revenues.

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

Turns (Millions) 3,601 3,626 3,526 3,756 3,502 3,250 3,100 3,100 3,250 3,450

Spending ($ Millions) 9,655 10,099 10,227 10,259 9,911 9,440 9,225 9,370 9,668 10,150

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Figure1: VHS and DVD rental turns (units) and revenues ($, Millions) in the US.

Value Chain:

By the standard categorization of the motion picture industry value chain, Netflix inhabits the allocation section. Nature of this industry can be jumped out with three conclusions immediately:

First, many of the company in the industry are upright incorporated firm whose needs to defend their market share and profit, that might come into variance with Netflix. Netflix resources are from a small number of dealers with momentous compromise power.

Second, allocation is the most compactly populated sector of the chain. This sector is also occupied by television, Video on demand, movie theatres and retailers.

Third, allocation will be the sector most radically exaggerated by the tectonics of the coming technological transformation. A predecessor of upcoming revolution is the PVR.


Position in Value Chain:

According to a value chain viewpoint, if we prefer Netflix as a “allocation” actor, then we would comprise movie theatres and TV channels as direct competitors.

Movie Theaters

Hotels and airlines

Video sales & rental

Premium cable

Basic cable

Motion picture release-window sequence

debut +5 months +12 months

Source: Netflix, Inc. coverage, Wedbush Morgan Securities

Figure 2. The Motion picture release-window sequence.

Stock Performance Graph:

This graph evaluates five years performances year ended in December 2010, the cumulative shareholders return to the Netflix’s common stock with the return of the NASDAQ Composite Index, the S&P North American Technology Internet Index and the S&P 500 Index. Netflix was added to the S&P 500 Index end of the 2010:


Figure3. Stock performance (2005-2010)

Strategic Analysis:

To analyse strategic condition of Netflix we should follow Mintzberg 10 schools of strategy. In this essay I will go through 10 schools.

Prescriptive Schools:

1. Design School2. Planning School3. Positioning school

1. Design school: Design school analyses how strong business condition is. This is neither analytical nor intuitive but Static. In design school SWOT analysis is the best fit. Below I’ve done SWOT analysis on Netflix:

SWOT Analysis:

Strengths : Netflix uphold strategic relationships with studios. Netflix has a wide and huge library. It has over 25,000 film title and

all feature film spread over 12 Million disks


Netflix is a recognize brand. It is the largest online DVD rental service in the US.

It has a widest delivery network With 30+ distribution centers all over USA and making more around the world.

Recommendation engine also a viewpoint for Netflix. The numbers of clients are increasing rapidly. Netflix charging very low prices per title.

Weaknesses : Netflix has some very strong suppliers. Test, preference, customer loyalty is vital roles. Voluntary rating also the weakness of Netflix. Netflix only can use DVD when particular movie is out in the market.

Opportunities : DVD format will dominate the market next 10 years. DVD installed base is growing day by day. Using of internet is growing up. People are more interested to rent a DVD instead buying it. Netflix can know the consumer test so that, they can make their

service in profitable way.

Threats : Netflix depends on very few suppliers. Studios might not be agreed with present revenue sharing contract. DVD prices in retail stores are falling down. Various channel for movie can move the customers. Some new entrants are interested in this business.

2. Planning School: Netflix’s present aim to expand its business globally. After Canada, Latin, Carrabin recently started business in UK. Alongside market extension Netflix needs to do plan for future, as more competitors can come to the industry with new technology.

3. Positioning School: This school observe analytical process of strategic formation. It analyses within the context of the industry and examine how can it develop its strategic positioning within the industry. We can use Five forces, BGC matrix to observe this, I’ve used Five forces to examine it:

Five Forces Analysis:


Suppliers:

Film Industry makes a very strong impact on Netflix’s business. Main products are delivered by major Hollywood film distributors.

Delivery services, endow with the United States Postal Services.

The Transaction processing services, provided by the major card companies (Visa, MasterCard, Pay pall, American Express)

Buyers:

Netflix distributes its services to the real consumer, which provides the company positive sovereignty. Nevertheless demand for motion pictures is extremely reliant on intangible and unmanageable issues such as personal interest, sensitivity, prejudice and recommendations. This detail introduces positive instability in demand; this is neutral for this business.

Substitutes:

Home video online can be substituted by other in-home holiday activity. Consumers can take other options within the media type such as magazines, video games and Internet browsing. There have some Complement to the service of Netflix also, First of all consumer must have TV sets. Secondly, videogame console or DVD player and Internet connection and knowledge of using it.

Competition:

The competition in the DVD rental industry is already thorough with dominant and recognized company such as Blockbuster and Hollywood Entertainment Etc. Here are some types of competitor of Netflix:

Cable providers

Movie retail stores

Online DVD sites

Internet movie providers

Direct broadcast satellite providers

Barriers to entry:


Entry in to this business is not complex or restricted. Entrants, who want to make a large DVD library, can make their investments in small controllable size. The only hard thing of this industry is to get license from film industry.

Descriptive Schools:

4. The Entrepreneurial School : This school analyses visionary process of company. We should discuss about leadership style of Netflix in this section. The seven aspect of Netflix culture are:

High performance, Value are what we value Freedom and responsibility Pay top of market Promotion and development High aligned Context, not control

Netflix wants to make a work environment where they can attract creative and innovative people. From the above analyse we can say Netflix is following participative/ Democratic leadership style.

5. The Cognitive school : This school distinguish strategic structure as a mental process. It discusses working styles in the business. Whole brain model, Groupthink and Johari window is the tools for this school. Below I’ve discussed Whole brain model:


Logical, quantitative and analytical fact: To expand business internationally Netflix needs to increase in distributors and quantity of each titles.

Creativity: One of Netflix’s aspects is to make good work environment to attract creative and innovated people. Netflix is looking forward to create new way to do business and serve its customers.

Organized planned: Netflix is a democratic leadership model. It has over 900 in office staff with simple position hierarchy.

Interpersonal : In business interpersonal things means ethical matters. At this moment Netflix is not doing any remarkable social affair but as long as it expanding internationally Netflix needs to think about it.

6. The Learning School: This school concentrate on emergent process. Organizational learning, knowledge management, SECI model is the tools for the learning school. Bellow I’ve analyse SECI model for Netflix:

Socialization: Netflix supplying DVD on demand by customers, alongside it is supplying TV series depends on particular area.


Externalization: To make a extend business, Netflix working with more than 30 distributors in USA. Moreover, Netflix is expanding its business to other country.

Internalisation: Netflix should work more on its internal matters, it should invest more on market research also to upgrade customer service system.

Combination: Combination with present technology and future technology should be needed. Netflix has to research on upcoming technology in this industry.

7. The Power School: Netflix has giant competitors in the same industry, like Blockbuster, Hollywood entertainment, Amazon etc. These companies are stronger in market and also with capital. But still Netflix is doing good business.

8. The Environmental School : Other school see it as a factor but this school see it as an actor. This school analyses the reactive process on particular industry.

9. The Culture School: Netflix leads a good working culture, The working environment is too flexible and creative. Netflix is making a nice culture to attract creative and innovative people.

10. The Configuration School: This school analyses the process of transformation. Netflix starts its business within an area and later on its was started doing business all over the USA, within short period of time it is now expanding its business globally.

PEST analysis:

Political Factors: International policies can affect on Netflix’s business expansion. For example, Google has been banned in China. So Netflix need to be more cautious on international politics.

Economic Factors : Currency fluctuation is the main player in international business. Some countries money value can be very dissimilar so it can be sometimes obstacle for expanding business internationally.

Social Factors: In some countries ethical and religious factor is social main element. Sometimes internet access is prohibited in some countries.

Technological Factors : DVD rental industry is a highly technology depends industry. So Netflix needs to be up to day in this matter.


Strategies Taken: Below is a short explanation of a few of the key strategies that Netflix has taken:

One flat fee with no late fees: This is a super strategy that Netflix employs. The subscription plan was very modern and attractive feature of the service of Netflix operation.

Huge selection of titles: Collection of titles is the largest in this industry. It is contained over 25,000 titles with 480 copies under each titles.

“CineMatch” Recommendation System: In the beginning of membership registration Netflix ask for preference of movies of consumer as a result they come to know what will be the recommendation for the particular clients

Utilization of Old Catalogue: By using the CineMatch process Netflix can suggest its client titles from the back catalogue.

One Month Free Trial: This is most effective strategy. Netflix offer one month free trial membership, in this time consumer can use the facilities as usual; as a result most of the consumers start to use the service continually.

Online ordering: On Netflix website clients can place the order. Netflix has queuing system, so if any new movie about to come clients get it first in first out basis.

Payment System and cancelation: Netflix clients have right to cancel their membership at any time and they payment system is also simple, clients can pay by credit card or through pay pal and in a specific date.

Profits Sharing : Within contractual agreement between Netflix and film distributors Netflix don’t buy and DVD and doesn’t pay any straight payment. It pays 15% of profit on every title.

Fast distribution system: Netflix has more than 30 distribution center in US and increasing around the world. Netflix make sure to have the disk next day of ordering it.


Critical Evaluation of Strategies : This is a solid brand. The evaluation of the strategies of Netflix is optimistic. Netflix is successful business model. Overall strategy of Netflix has leading profitable situation:

First mover advantage: Netflix introduced online ordering system with flat fee model. This thing makes Netflix identical with the business model and gives the company reliability and visibility.

Title managing: The size of collection helps to increase the subscribers and minimize the chance to stock out.

Expected demand: Clients add their preference categories in their account so Netflix can know what types of movies order can be getting from these clients.

No late fees: This element of pricing strategies helps Netflix to have a stable revenue flows. Netflix offers difference price point promotion so that users are paying money whatever they are using for.

Online catalogue and ordering: Choosing and ordering through online is better for clients and Netflix. It experiences good for clients. Users can get their titles without going outside.

High consumption of back catalogue: Utilization of old stocks leads smoother distribution in low price.

International extension: Netflix is very active to extent its business to worldwide. Netflix already started business in Canada, Carrabin and recently in UK. Netflix has declared plans to develop internationally, specifically South America and Europe. In the UK, this is a new market for Netflix, where already some same kind of business running. Blockbuster is a big threat and also Love film up growing player. The size of Uk market for Netflix estimate as 20% of US market. Finally, aim of Netflix for UK and other country should be introducing brand in the local market for future business purpose.

Conclusion:


From above discussion so far, we can see that Netflix already gained its leadership position for its first mover advantages and innovation. Nevertheless this leading position is insistently attacked and not sustainable even in the medium term.

Competition in international market will be very much tough in coming years, because some giant players are already active in this field like Wal-Mart, Amazon, and Blockbuster etc.

It is not possible to know the exact market position but Netflix cannot maintain the growing of its international market with its power. First of all, Netflix does not have enough financial force and market share. Secondly, it’s difficult to have new capital without solid foundation.

Netflix should use some strategy to compete with giant players in international market:

Joint force:

To stay in the big competition, Netflix should merge with actors like ‘Family Video’ or ‘Hollywood entertainment’. With greater capitalization Netflix might recover the odds to win the competition.

Be smarter and quicker:

If Netflix like to compete in the market, it should be smarter and quicker in strategic decision. Netflix already prove they are good in strategy but Netflix needs to think more about future market.

Secure the number of own customer : At present Netflix has satisfying number of customers. Netflix need to keep their customer happy and keep touching with them. At the mean time, Netflix needs to increase this number. Strategy like one month free trial is much appreciated.

Plant roots in the deep futur e: It is now understandable that. Technology will be the main factor in the relocation of the value chain of this industry content delivery in the coming days. Netflix is already delivering movie in digital format instead of physical DVD. But in future movies will be delivered by clients IP address which is still unclear form. In this case, Netflix should be smarter than other players. Also Netflix should invest more capital in research to invent new way of services.


References:

Books:

Hill, C. & Jones, G. (2008) Strategic management an integrated approach, 8th Ed. USA : Cengage Learning.

Amason & Allen C.(2011) Strategic management: from theory to practice. UK: Routledge.

Hitt, M., Ireland, D. & Hoskisson, R.(2011) Concept Strategic Management: Competitiveness & Globalization. USA: Cengage Learning.

Mintzberg, H., Ahlstrand, B. & Lampel, J., (2008) Strategy Safari: Your complete Guided Tour Through The Wilds of Strategic Mangament. London: Pearson.

Pettigrew, A., Thomas, H. & Whittington, R. (eds) (2006) Handbook of strategy & management. british library.

Fine L.(2009), The SWOT Analysis: Using Your Strength to Overcome Weaknesses, Using Opportunities to Overcome Threats, USA: CreateSpace.

Griffin, R.(2007), Fundamentals of Management, USA: Cengage Learning.

Paul, D., Yeates, D. & Cadle, J.(eds.) (2010) Business Analysis. 2nd ed, UK: british information society ltd.

Williamson, D.(2003), Strategic Management and Business Analysis, Oxford : Butterworth-Heinemann.

Internet Source:

www.netflix.com http://www.wiggo.com/mgmt8510/Readings/Readings2/Mintzberg1990SMJ.pdf

(Accessed on 12/04/2012) http://files.shareholder.com/downloads/NFLX/1803970225x0x460274/17454c5b-

3088-48c7-957a-b5a83a14cf1b/132054ACL.PDF (Netflix annual report, Accessed on 14/04/2010)

http://topics.nytimes.com/top/news/business/companies/netflix-inc/index.html (Accessed on 18/ 04/ 2012)

http://www.geek.com/articles/tagged/netflix/ (Accessed on 16/04/2012)


http://www.geek.com/articles/tagged/netflix/

http://topics.nytimes.com/top/news/business/companies/netflix-inc/index.html

http://files.shareholder.com/downloads/NFLX/1803970225x0x460274/17454c5b-3088-48c7-957a-b5a83a14cf1b/132054ACL.PDF

http://files.shareholder.com/downloads/NFLX/1803970225x0x460274/17454c5b-3088-48c7-957a-b5a83a14cf1b/132054ACL.PDF

http://www.wiggo.com/mgmt8510/Readings/Readings2/Mintzberg1990SMJ.pdf

http://www.netflix.com/

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