Netflix Individual Case Study

2 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY Table of Contents Executive Summary……………………………………………………………………………...3 Existing Mission Statement……………………………………………………………………...3 New Mission Statement………………………………………………………………………….4 Analysis of firm structure……………………………………………………………………….5 SWOT (TOWS) Analysis………………………………………………………………………..6 Five Forces Analysis…………………………………………………………………………… Confrontation Matrix…………………………………………………………………………… Impact/Probability……………………………………………………………………………… Positioning Map…………………………………………………………………………………. EFE / IFE / IE Matrix……………………………………………………………………………. SFAS Matrix…………………………………………………………………………………….. Competitive Profile Matrix……………………………………………………………………… Assessment of firm functional areas……………………………………………………………. BCG Matrix………………………………………………………………………………………. GE/McKinsey Matrix……………………………………………………………………………. Industry Life Cycle Analysis……………………………………………………………………. SPACE Matrix…………………………………………………………………………………… Grand Strategies Matrix…………………………………………………………………………. QSPM Matrix…………………………………………………………………………………….. Alternative strategies, recommendations, and objectives……………………………………… Firm Ratios………………………………………………………………………………………. Consolidated Finance Statements………………………………………………………………. References………………………………………………………………………………………… 3 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY Executive Summary “Netflix was first founded in August of 1997 by two serial entrepreneurs Marc Randolph and Reed Hastings. The company started out in Scotts Valley, California and has grown to become the world's leading internet entertainment platform. When it first opened, Netflix was purely a website-based movie rental service. It allowed people to rent DVDs online” (McFadden, 2019). According to an article, Netflix’s brand strategy aligns with the concept for competitive advantage (Porter’s Model) and intensive growth strategies (Ansoff Matrix). With these strategies, it puts them in a leading position for the digital streaming industry (Moore, 2019). They have many business models, one being the pipeline and platform model. This controls the digital content that we, as consumers, see on our screens and choose what to watch. However, one must become a member to access these benefits of Netflix. This represents their unlimited subscription business model, where they give their members unlimited access to their content. It is the 125 million subscribers in over 190 countries that bring in the $141 billion in revenue. “Overall, Netflix consumes more bandwidth than Youtube, Amazon, and Hulu combined at their peak periods according to a report put out by Sandvine, a Canadian bandwidth-management systems vendor” (Berstein, 2019). Existing Mission Statement “A mission statement should define what the company is, define what the company aspires to be, define the limitations, be broad enough to allow for creative growth, define what distinguishes the company from others, define the framework to evaluate current activities, and be defined clearly for all to understand” (Kipley & Jewe, 2014). Knowing this, one can detect that Netflix’s mission statement follows these requirements. 4 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY Netflix’s existing mission statement is: Our core strategy is to grow our streaming subscription business domestically and globally. We are continuously improving the customer experience, with a focus on expanding our streaming content, enhancing our user interface and extending our streaming service to even more Internet-connected devices, while staying within the parameters of our consolidated net income and operating segment contribution profit targets. (Netflix, 2019). This mission statement is very concise and direct with who Netflix is and wants to be in the future. They are clearly targeting the entertainment market to guide a higher performance achievement. It involves entertainment media and the worldwide scale. The media includes the movies, shows, series, and performance arts Netflix offers on their site. To effectively entertain the world displays their organizational structure to provide their service to any audience or and market. Moreover, it shows that they are not limited to the digital world and want diversification for the satisfaction of their consumers and business. Then, it goes on to make sure that this expansion goal is also aligning with their financial plan. Despite the competitors Netflix faces, they satisfy their strategic requirements. (Rivera, 2019). New Mission Statement Netflix’s mission statement shapes what they primarily want to do, entertain the world. However, they thoroughly included each aspect of their company; the consumers, their service, and their finance. What could be improved in their mission statement is what differentiates them to have a competitive advantage versus other digital entertainment services that are present now and will be created in the future. Technology is only improving from here and Netflix has to keep up. 5 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY The new mission statement I would recommend Netflix to implement is as follows: “Our core strategy is to be a worldwide entertainment service that showcases movies, shows, series, and various performance arts to grow streaming subscription business domestically and globally. We are continuously improving customer service by meeting their needs, with a focus on expanding our original content production and on-demand digital content streaming. We enhance our diversification of user interface and extend our streaming service to even more Internetconnected devices as we partner with various Internet service providers. This is all while staying within the parameters of our growing net income and operating segment contribution profit targets.” Analysis of Firm Structure Having a firm structure is important because it allows for control and regulations within the firm to succeed. “A firm’s organizational structure is the practical manifestation of organizational design elements that influence how various components of the business function and work together” (Anderson, 2019) “Through this corporate structure, the company (Netflix) is able to continually evolve to offer original entertainment content and on-demand media streaming service that attract target customers around the world” (Anderson, 2019). Based on my research, Netflix is firm in structure and can respond well to any changes in consumer needs. So much so, it has placed them in a good position against its competitors of Amazon, Disney +, and Hulu. The specific structure they follow is unitary and involves executive direction and control. They have three main characteristics: functional groups for online and non-online operations, geographical divisions for managing regional markets, and divisions for various product types and operation types (Anderson, 2019). This structure is effective and efficient for Netflix for it also provides 6 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY flexibility and support for their business. SWOT (TOWS) Analysis “The purpose of a SWOT Analysis is to identify the strategies that will create a firm, specific business model that will best align an organization’s resources and capabilities to the requirements of the environment in which the firm operates” (Kipley & Jewe, 2014). Moreover, this technique is used to determine the internal strengths and weaknesses of a firm and the external opportunities and threats the firm faces. The following chart is a reflection of the entertainment streaming services that Netflix provides and displays the organization’s internal 7 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY and external situations. Netflix has many strengths including high brand equity, competitive pricing, and active/positive user experience. “In this SWOT analysis case, the brand enables the movie streaming company to maintain its popularity and ability to penetrate its current markets. In addition, its large platform of content producers and consumers is a strength that allows Netflix to maximize its operational effectiveness, service attractiveness, and business growth” (Rivera, 2019). However, likewise in any company, there are weaknesses. Netflix’s weaknesses are how imitable their business model is, operational costs, and the dependence on producers and internet providers (Rivera, 2019). The opportunities obtainable are: penetrating to new markets in China, growing through product mix, and improving business diversity. To gain a competitive advantage Netflix would need great support and intensive strategies to expand their target market. The greatest threat for them would be the competitive pressure due to competitors like Hulu and Disney +. They have similar streaming services, all offering different shows and movies for different prices. Therefore, Netflix needs to position themselves for a loss in profit as Disney + just released November 12, 2019. Even though they are still gaining the views and revenue to uphold their service, the threats of imitation, cybercrime, and failure of diversity must be reviewed frequently. 8 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY Five Forces Analysis “Porter Five Forces Analysis is a strategic management tool to analyze industry and understand underlying levers of profitability in a given industry. Netflix, Inc. managers can use Porter Five Forces to understand how the five competitive forces influence profitability and develop a strategy for enhancing Netflix, Inc. competitive advantage and long-term profitability in CATV Systems industry” (FernFort University). Netflix has a moderately low threat showing that they are able to easily innovate new products and services for their new and loyal customers. Because Netflix has had such a positive and firm foundation with their research and development, new entrants are not normally an easy 9 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY threat. They also have a moderate threat to supplier power because these systems buy their raw materials from multiple suppliers. Therefore because of the numerous suppliers, Netflix does not worry if one supplier were to raise prices, they could find another one. However, most suppliers would not even attempt to increase prices because supplier business usually depends on the firm. Speaking of demand, buyers are often finding the best quality streaming service at a low price. Buying power is a low threat to Netflix because if they keep creating new products or services, customers will not want to bargain for these new innovations. The threat of substitution is a moderate threat to Netflix because “when a new product or service meets a similar customer needs in different ways, industry profitability suffers” (FernFort University). They can overcome this threat if they focus on their service orientation over their production by meeting the needs of the consumers. Lastly, rivalry, being such a high threat to the company, Netflix must expand their competitive advantages and maybe even collaborate with those competitors. By understanding these five forces, “the Netflix managers can shape the forces in their favor” (FernFort University). 10 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY Confrontation Matrix The confrontation matrix is used to further analyze each contribution of the SWOT analysis and to help managers identify the most important strategic issues the organization is facing (Kipley & Jewe, 2014). This matrix displays the internal strengths and weaknesses and external opportunities and threats of the company. This expresses the competitive advantages Netflix has and clarifies any alternate strategies they should implement. 11 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY Impact/Probability Matrix The Impact/Probability Matrix displays all of the opportunities and threats that were generated in the SWOT Analysis. It represents the impact of the threats and achievements of opportunities if they were to occur and the probability of them occurring. Some of the biggest threats Netflix faces is their competitive pressure and the probability is high due to it already occurring in reality today. Their best opportunity would be to grow through product development so they can innovate for new and loyal customers. From this matrix, Netflix could take advantage of the opportunities presented that are most probable and impactful. 12 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY Positioning Map The Positioning Map displays Netflix compared to its competitors: Hulu and Disney +. It measures it by its’ price and quality, showing Netflix as having a higher price than both companies and weaker quality than Disney +, but better than Hulu. From this graph, one can detect that Disney + has a slight advantage to Netflix, concluding that Netflix should enhance their content and maybe lower their prices in the near future. EFE / IFE /IE Matrix The External Factors Evaluation Matrix lists the external opportunities and threats the company is facing and assigns a weight, rating, and overall score of each. Then, the Internal Factors Evaluation Matrix lists the internal strengths and weaknesses by also assigning a weight, rate, and score to each factor. As both matrixes are calculated, they are then plotted on the Internal/External Matrix. This shows us the analyzation of the current position Netflix is in and what strategies to implement in their future. With an EFE of 2.58 and IFE of 2.47, Netflix falls in 13 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY the middle of the chart. This recommends us to use a hold and maintain strategy. Meaning that the company should “pursue strategies focused on increasing market penetration and product development” (Maxi-Pedia). 14 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY SFAS Matrix The Strategic Factor Analysis Summary Matrix is a similar chart to the ones created above, but instead reorganizes the SWOT analysis to find out the top three factors that were weighed the highest. The weight is adjusted so all of the factors add up to one, then given a weighted score. However, this matrix adds a duration section that analyzes whether the factor is short, intermediate, or long-term and provides comments for why these factors are relevant to the duration chosen. From this chart, one can see that Netflix has short, intermediate, and long-term factors, concluding that this company has many things to develop on. Competitive Profile Matrix A Competitive Profile Matrix is an analysis that allows my company (Netflix) to be compared to other competitors to reveal the differences in strengths and weaknesses. I chose to use Hulu, Disney +, Vudu, and Amazon Prime Video to weigh and rate the critical success factors of each industry. From this matrix, we can see that Disney + is doing 6% better than 15 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY Netflix. However, both are doing better by 60% and should continue innovating and expanding their business to help keep a competitive advantage. Assessment of Firm Functional Areas Many businesses consist of numerous functional departments such as Human Resources, Research and Development, Marketing, Finance, Operations, etc.… These teams come together to use their knowledge and skills for the benefit of the company. Below are some of Netflix’s functional areas: CEO: Reed Hastings co-founded Netflix in 1997 and is now the CEO of the company. He wanted to create a vision for the company to have a sustainable competitive advantage based on the critical factors developed by the people on his management team (Falter & Thompson, 276). Product Management: Greg Peter is the Chief Product Officer since July 2017. He leads his team to generate a better Netflix experience by expanding the business development, creative production, core engineering, video encoding, and much more. This team provides a unique experience to its’ consumers by customizing and personalizing the website to fit the consumers liking. “This includes the movies they see on each page, the recommendations they receive on movies, and the critical account management tools…” (Falter & Thompson, 277). 16 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY Corporate Functions: Spencer Neumann was recently considered CFO in January 2019. His team consists of people who work in communications, customer service, employee tech, finance, legal policy, and much more. According to Netflix’s job website, their team goals include i) providing accurate, timely and complete production budgets and estimated final costs ii) protecting company assets through cash management, policies and procedures and iii) providing shows with the production finance support to facilitate producing great content (jobs.netflix.com). Marketing & Publicity: Jackie-Lee Joe recently got hired to be the Chief Marketing Officer to lead her team to develop creative marketing, publicity, partner marketing, consumer products, and much more for the Netflix company. This team’s responsibility is to “find the most effective and cost-efficient methods to acquire new subscribers through various marketing approaches” (Falter & Thompson, 277). Content: Ted Sarandos is Chief Content Officer who oversees the creation of all Netflix content and many original series (Media Netflix). This consists of content legal, creative content, post-production, animation, and much more. This team cultivates partnerships with other networks, studios, and producers to expand their distribution channels. They also make sure their on-demand digital content is updated for the satisfaction of the consumers. Operations: They focus on corporate security programs to protect staff, facilities, and the overall management to align strategies customized by location, incidents, and threats (jobs.lever.co). Talent Management: This team is running by Jessica Neal as it plays a “large role in establishing a culture in which employees are devoted to superior customer service” (Falter & Thompson, 277). 17 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY BCG Matrix The BCG Matrix is “designed to help with long-term strategic planning, to help a business consider growth opportunities by reviewing its portfolio of products to decide where to invest, to discontinue or develop products” (Hanlon, 2019). I decided to compare Netflix to its’ top competitors: Hulu, Amazon Prime Video, and Disney +. Amazon was the leading competitors in revenue; however, it was difficult finding the results of only Prime Video and not Amazon Prime itself. Although, when comparing Netflix to its imitation company of Hulu, one can conclude that Hulu also has a higher revenue. Netflix itself has a high relative market share and average growth rate which puts them in the star quadrant, meaning their best strategies would be backward/forward integration, market penetration, market development, and product development. These results comply with the findings within the case study. 18 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY GE/McKinsey Matrix The GE/McKinsey Matrix offers a strategic approach to show the firm’s performance to help prioritize its’ investments among its business units (Jurevicius, 2014). The industry attractiveness is used to indicate the level of difficulty for a company to compete in the market compared to its’ competitors. Once the comparison of industry attractiveness and business unit strengths are compared, they are given a calculated weighted score. Showing that Netflix’s industry attractiveness of 3.0 (high) and business unit strength of 3.38 (high), this puts them in the position to pursue investment to maintain their successful market share. 19 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY 20 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY Industry Life Cycle Analysis The Industry Life Cycle consists of four stages: Introduction, Growth, Maturity/Stabilization, and Decline. Based on the graph, Netflix is hitting the maturity stage due to the stable market penetration that Netflix has built for itself over the past years. It would be quite difficult for other firms to enter the market and reach the foundation that Netflix has consistently kept for the past 10 years. However, Netflix may see some decline in their near future due to the process of the Industry Life Cycle. Because “at this stage, companies realize maximum revenue, profits, and cash flows because customer demand is fairly high and consistent. Products become more common and popular among the general public, and the prices are fairly reasonable compared to new products” (Corporate Finance Institute). 21 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY Space Matrix The Strategic Position Matrix or Action Evaluation Matrix has similar qualities to the SWOT Analysis in how it uses the internal strengths and weaknesses and external opportunities and threats. However, in this chart it compares the financial strength and industry stability with the environmental stability and financial strength of the firm. Calculating the average ratings for each strategic factor, an X-axis and Y-axis score is presented. Giving my x-axis is 1.33 and yaxis is 0.8, it places Netflix in the positive, right quadrant of the graph. 22 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY Grand Strategy Matrix The Grand Strategy Matrix is used to analyze the competitive position and market growth a company is in. Based on the results found, Netflix was positioned in Quadrant 1 that included the following strategies: market development, market penetration, product development, forward integration, backward integration, horizontal integration, and related diversification. Netflix is on the right track of already integrating many of these strategies into their business model, so as long as it continues to prioritize these strategies, they will stay continue having great results. 23 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY QSPM Matrix The Quantitative Strategy Planning Matrix analyzes “possible strategies based on previously identified external and internal critical success factors” (Kipley & Jewe, 2014). This matrix provides detailed weights and two strategic options: product development and market penetration to determine the best strategy the company should take on. Considering the results of the matrix, Netflix should invest in product development, for they it had a 0.36 lead compared to penetrating in a market. Even though both strategies seem suitable for the company to pursue, option one assumes to be the best strategy. Doing this allows them to innovate new digital products as the world itself is progressing in digital entertainment. Aspects like the “download feature” that Netflix recently adopted has helped increase profit for consumers who want to enjoy the movies or shows online without using Internet. CPO, Greg Peters mentioned that “Netflix has focused on making their video encoding as efficient as possible so that even on a low bandwidth, users can experience high-quality streamed content” (Choudhury, 2017). 24 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY Alternate Strategies, Recommendations, and Objectives Evaluating each matrix, I have found that the results all lead to the same conclusion. That conclusion includes the strategies and recommendations Netflix should pursue to increase their chances of keeping a long-term and sustainable company. I have found three main strategies that this case study has concluded for me: market penetration, product diversification, and business diversification. By focusing on these key strategies, Netflix could maximize their growth market share for global entertainment 25 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY domination. Strengths like loyal, active users and high brand equity creates such a firm foundation and is represented in the success of their revenue and subscription numbers. “The international opportunity is clearly indicated in earnings and subscriber growth, and Netflix is primarily in the red with free cash flow due to producing content for various regions” (Kindig, 2019). Therefore, Netflix must recognize their greatest weakness of competitive pressure and implement the strategies discovered in this case study. Firm Ratios (MACROTRENDS, 2018) 26 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY Cash-To-Debt: 0.36 (GURUFOCUS, 2019) Quick Ratio: 0.73 (GURUFOCUS, 2019) EPS (basic): $3.24 or 12.2% growth (GURUFOCUS, 2019) EPS (diluted): $3.13 (GURUFOCUS, 2019) Income Statement (MACROTRENDS, 2018) 27 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY Balance Sheet (MACROTRENDS, 2018) 28 RUNNING HEAD: NETFLIX: INDIVIDUAL CASE STUDY Cash Flow Statement (MACROTRENDS, 2018)