Managing Strategy and Netflix - Essay Example

Managing Strategy: Netflix Introduction Netflix Inc is one of the leading companies in the world that provides internet subscription services for movies and TV shows. The company also specialises in providing services of on-demand internet streaming media. Furthermore, Netflix provides subscription-based digital distribution services. Netflix was founded in 1997 in Los Gatos, California and has since experienced tremendous growth and success such that it has expanded into markets such as Denmark, Finland, Norway, Sweden, Latin America and Caribbean. Moreover, it is estimated that the company has over 26million subscribers around the world and total annual revenue of 1.5 billion (Netflix 2012; Netflix, 2012b). Over the years, Netflix has employed strategic techniques and approaches in order to provide to its customers services characterised by value, convenience and selection. The strategies employed by the company have overtime helped to steer it towards efficient service delivery, increased customer base, profitability and a competitive edge over rival companies. Nevertheless, the company has experienced numerous strategic challenges that have threatened its competitive edge in the market (Rothaermel 2012). The key aim of this paper is to examine and analyse Netflix’s strategy as depicted in the provided case study. Foremost, this paper will identify and examine key strategic issues facing Netflix and the causes of these issues. Moreover, it will critically analyse strategies used by Netflix and how the company has addressed its strategic issues adequately. Based on the identified strategic issues faced by Netflix, this paper will propose and justify strategic options that the company can adopt and implement in order to realise better outcomes. In addition, this paper will evaluate the appropriateness, usefulness and limitations of the proposed strategic options. Strategic Issues facing Netflix and their causes Netflix’s inability to effectively meet is its value proposition is one of the key strategic issues facing the company. According to Barnes, Blake & Pinder (2009) a value proposition is a promise that a business makes to its customers on the value that the business will provide. Kaplan & Norton (2004) observe that strategy should be based on a differentiated value proposition to customers. Meeting the needs of customers is the key source of sustainable value creation. Kaplan & Norton (2004) further assert that customer value proposition is one of the most important aspects of strategy. Neflix’s value proposition is to provide to its customers services characterised by value, convenience and selection. Following the launch of Netflix’s services in the market, Reed Hastings, the company’s CEO adopted an operation model that capitalised on the use of postal services to deliver to its customers their DVD rental orders. Rather than replicating Blockbuster’s model of opening video rental chains in different locations, Netflix opted to use postal services due to ease in delivery and its cost-effectiveness. The company used a similar pricing model used by traditional video stores. Customers who carried out their movie selection through the company’s website were charged $4 for renting a $2 for shipping. However, a considerable number of customers felt frustrated with the company’s services due to the shipping delays and the somewhat long delivery waiting time. Customers felt that the company’s rental prices were similar to competing rental chains yet the company provided slower delivery services. Neflix’s inability to meet its value proposition is majorly brought about by service delays (Rothaermel 2012). Michael Porter’s five forces of industry analysis provides a suitable framework that can be used to analyse some of the strategic issues faced by Netflix and the overall industry that the company operates in. According to Porter (1979) the five key forces that influence competitiveness and viability of an industry include; threat of new competition, threat of substitute services or products, intensity of competition and the bargaining power of suppliers and consumers (Porter, 2008). In the case of Netflix, some of the industry forces that act as major issues in the company’s strategy include; the bargaining power of suppliers and customers, intensity of competition and threat of substitute services or products. Issues relating to the bargaining power among suppliers and consumers are brought by high cost of operation. High cost of operation is a major strategic issue facing Netflix. As Netflix’s customer base increased with time, the costs of subscriptions and the costs accrued when acquiring movies for rent also increased. The increasing customer demand of rental movies posed a major challenge to the company as far as building a film library is concerned since it was very expensive. Moreover, a significant number of the DVD’s the company was shipping were very expensive since they were brand new. Increasing customer demand was one of the key causes of high costs of operation. Furthermore, the high costs of operation can be linked to market variables associated with the film market. For instance, Netflix had no direct relationship with major film studios thus the company relied on getting its stocks from small film distributors. This may have in turn contributed to the high operation costs associated with acquiring rental movies (Rothaermel 2012). The emergence of the Video on Demand (VOD) technology to some extent poses a threat to Netflix’s business. The emergence of VOD technologies brings the threat of substitute services or products. When VOD platforms are established, customers will no longer need to choose between impulse and selection rentals. Rather than subscribing to online DVD rentals or renting DVD’s from traditional video stores customers can easily watch their movie selection immediately via the internet. Consequently, the adoption of VOD technologies by consumers may render online DVD rentals services such as that offered by Netflix obsolete. In addition to this, intensity of competition is also a major strategic issue faced by Netflix. The entry of Blockbuster into the online rental market and the presence of online sites such as Movie Link and Vongo which offer VOD service further intensifies the competition in the industry that Netflix operates in (Rothaermel 2012). An analysis of strategies used by Netflix Grand & Jordan (2012:17) observes that a strategy is a means through which organisations or individuals realise their objectives. A strategy can also be considered as a determination of long-term goals and objectives of a business, the adoption of various courses of action and the allocation of resources required to realise the set goals and objectives. Netflix key goal is to provide to its customers services characterised by value, convenience and selection. Nevertheless, in the course realising this goal, the company has witnessed a wide range of strategic challenges and issues. The strategic issues highlighted in the section above are some of the challenges that the company has encountered in the course of implementing its strategy. In order to address these issues the company employed counteractive strategies. For instance, in order to address strategic issues on the inability of Netflix to meet its value proposition, due to service delays, the company’s management shifted its subscription model. The company shifted to a prepaid subscription service in order to provide value to its customers. Through this shift, the company hoped to turn its longer delivery periods into an advantage. This subscription model allowed customer to have more than one movie in the possession. In this case customers could keep in their possession a maximum of four movies at the same time. In order to address the issue of service delays the company also adjusted its pricing system by offering unlimited rentals and allowing customers to keep more than one movie at the same time and exchange the movies as frequently as they liked. Based on Porter’s five forces analysis model, one can argue that the adjustments of Netflix’s subscription services and pricing systems were triggered by the bargaining power of consumers in this industry. In respect to customer bargaining power, Hill & Jones (2009) observe that, the bargaining power of customers is the ability of customers to put pressure on a firm or an organisation to alter its service model or pricing system. From this case study is apparent that customer feedback and response on Netflix’s subscription model and pricing system prompted the company’s management to shift and make changes in its subscription services and pricing systems (Rothaermel 2012). In an attempt to address issues relating to high cost of operation especially when it comes to building a film library and acquiring rental movies, Neflix’s management hired a chief content officer, Ted Sarandos to manage content acquisition in the company. Through the help of Sarandos, the company formed studio revenue-sharing agreements with major studios. These agreements enabled the company to reduce its acquisition costs especially for high-demand releases. Moreover, these agreements enabled Netflix to develop and diversity its film library this turn helped the company to meet the diverse demands of its customer base (Rothaermel 2012). Based on a resource-based view of strategy, Netflix decision to form studio revenue-sharing agreements with major studios is a viable and effective strategy. Henry (2008: 126) notes that a resource-based view of strategy, accentuates on the internal capabilities of an organisation in developing a strategy in order to realise a sustainable competitive advantage in the industry that the organisation operates in. In this case an organisation uses its resources and capabilities to realise a competitive advantage. Internal capabilities of the organisation also determine the strategic choices that the organisation makes in order to compete with the external environment and achieve a competitive advantage. Resources or capabilities can either be tangible of intangible Grand & Jordan (2012:116), note that intangible resources such as human resources and brand name are very valuable to an organisation. In the case of Netflix, one can argue that the organisation used its intangible resources such as its brand name, reputational asset and human resource to realise a revenue-sharing agreements with major studios. This agreement in turn helped the company to achieve a competitive advantage since it was able to reduce its acquisition costs especially for high-demand releases and develop a film library with a wide range of diverse film stock thus meeting the diverse demands of its customer base (Rothaermel 2012). If Netflix did not have a strong reputation and strong brand name, chances are that a number of studios would have declined to make a revenue-sharing agreement with the company. Furthermore, Ted Sarandos the chief content officer, played an invaluable role in the realisation of the agreement. His expertise and experience in the field enabled him to facilitate the revenue-sharing agreement (Rothaermel 2012). Proposal and critical evaluation of Netflix strategic options In order for Netflix to develop a sustainable competitive edge in the market, the company should employ a hybrid strategy. In this case company should maintain its online DVD rental service model while at the same time capitalise on new technological innovations such as VOD. For instance, the company should adopt the Video on Demand (VOD) technology in order to provide internet subscription services for movies and TV shows. According to Grand & Jordan (2012:10), some of the key elements of a successful strategy include; simple and consistent long-term goals, an in-depth understanding of the competitive environment and an objective evaluation of resource. Based on these sentiments highlighted by Grand & Jordan (2012) on elements of successful strategy Netflix should adopt the VOD technology since it is bound to provide a long term and sustainable approach for the company to maintain its competitive edge in the industry. A critical review of the case study shows that the movie rental industry is continuously undergoing development. This development has been triggered by technological drivers. De Wit & Meyer (2004:427) observe that technological drivers such as new innovative technologies play a critical role in industry development. Therefore, there is need for Netflix to capitalise on the VOD technology in order to maintain its competitiveness in a continuously evolving industry that is triggered by technological innovations. At the same time the company should maintain its online DVD rental model since it has adequate resources to ensure the continuous and profitable running of this business model. On the other hand, the full adoption of the VOD technology poses a great threat to the company’s business. When Netflix adopts the VOD approach, customers will no longer need to choose between impulse and selection rentals. Rather than subscribing to online DVD rentals, customers may opt to watch their movie selection immediately via the internet. Consequently, the adoption of VOD technologies by consumers may render online DVD rentals services such as that offered by Netflix obsolete (Rothaermel 2012). Conclusion This paper has critically examined and analysed Netflix’s strategy as depicted in the provided case study. Moreover, it has proposed strategic options that the company can adopt and implement in order to realise better outcomes. The findings of this paper depicts that some of the key strategic issues faced by Netflix include; Netflix’s inability to effectively meet is its value proposition due to service delays, intensity of competition and high operation cost. In response to these issues, the company implemented counteractive strategies such as shifting its service subscriptions and changing its pricing systems. Moreover, Netflix formed studio revenue-sharing agreements with major studios in order to minimize costs (Rothaermel 2012). Subsequently, this paper recommends that in order for Netflix to realise better outcomes the company should use a hybrid strategy that involves maintaining its online DVD rental service model while at the same time capitalizing on new technological innovations such as the VOD. References Barnes, C., Blake, H. & Pinder, D. 2009, Creating and Delivering Your Value Proposition: Managing Customer Experience for Profit, Kogan Page, London. De Wit, B. & Meyer, R. (2004). Strategy: process, content, context - An international perspective, Thomson, London. Grand, R. & Jordan, J. 2012, Foundations of Strategy, John Wiley & Sons, West Sussex, United Kingdom. Henry, A. 2008, Understanding Strategic Management, Oxford University Press, New York. Hill, C. & Jones, G. 2009, Strategic Management Theory: An Integrated Approach, Cengage Learning, Mason, Ohio. Kaplan, R. & Norton, D. 2004, Strategy Maps: Converting Intangible Assets into Tangible Outcomes, Harvard Business Press, Boston. Netflix, 2012, Company Overview: Netflix revolutionizes the way people watch TV shows and movies, viewed on November 7 2012 Netflix, 2012b, Annual Report, viewed on November 7 2012, Porter, M. 2008, “The five competitive forces that shape strategy” Harvard Business Review 57, pp.57-71 Rothaermel, F. 2012, Strategic Management: Concepts and Cases, McGraw-Hill Companies, New York. Read More