Free Netflix Analysis Essay
Strategic Profile & Case Analysis Purpose
Netflix organization is part of the home video entertainment market. Actually, it is within the large video entertainment industry which has markets such as the hotel, airline, and theater video entertainment. Netflix organization is commonly known for initiating the internet delivery and streaming media. Still, the organization established a strategy that allowed consumers to access DVDs online. It also allowed the customers to extend rental periods without extra charges. Basically, Netflix organization focuses on improving the customers’ accessibility to the wide range of entertainment services. The organization relentlessly seeks after its customers’ preferences. This boosts the capacity of the subscribers who order for its services. Over the years, the organization has continually diversified its services based on the consumers’ preferences.
Netflix organization offers their services to in-home consumers through different channels. The organization offered its services at limited prices which highly attracted the consumers. Consequently, the organization built collaborations with the large film distributors through revenue sharing agreements. This enabled the organization to boost its library of movies since the different preferences of the consumers were growing. In 2003, Netflix had acquired numerous subscribers and its stock price was 50% greater than its initial public offering (IPO). During 2007, the Netflix organization initialized the streaming media services that catered for the dynamic consumer choices. Consequently, majority of the film distributors were thrilled by this idea. Netflix organization gained an enormous profit growth during that period.
Currently, Netflix organization is the global leading internet television network. Actually, it has over thirty million international streaming members and the population keeps elevating. Its services are distributed to numerous countries globally thus generating enormous profits. Apart from focusing on international business growth, Netflix is also concerned with the quantity of its rental selection. Basically a wider title selection enables the organization maintain and attract more consumers. Recently, Netflix organization obtained and sustained partnerships with chief studios such as Walt Disney, Paramount and Warner Bros. These agreements with movie and television producers offer Netflix organization an opportunity to incorporate a wider selection of television shows and movies. Still, Netflix organization has also handled the government policies such as The Video Privacy Protection Act which bans a video tape service provider from exposing the customer’s data without his or her consent. This protects their right to privacy.
After the modernization of The Video Privacy Protection Act, the members of the Netflix organization were allowed to share the streamed media with their acquaintances via Facebook thus reducing the marketing costs. Eventually, the Netflix organization diversified its services and established its production company known as Original series. The acquisition of content licenses from the producers had become quite expensive for the company. Presently, Netflix Company is focusing on producing more originally produced shows. The organization also stands firm with the idea that internet TV will be highly used in the future. However, DVD rentals operations in Netflix Company are experiencing gradual decline in comparison to the past years. The Company is experiencing great competition from organizations such as Google, Apple, HULU, Amazon, Verizon, and Coinstar. These competitors have devised strategies of reducing costs of the services offered thus causing unfavorable effects on Netflix’s business growth.
Despite the great number of obstacles experienced by the company in its operating environment, it continued to fair well and attained a customer base of 600000 in May 2002. The company also experienced number of financial challenges in its operation but these were reduced when it benefited from its initial public offering (IPO). The company managed to raise a total of $83 million that enabled it improve its advertisement strategies and diversification of its production to reach a wide range of potential customers. This gave the company an edge over other companies and it was able to obtain marginal benefits from the sales of its products. This also ensured it survived insolvency and it was able to settle many debts that it had. The signing of revenue sharing agreements is also considered a factor that contributed to the success of the company in its movie marketing activities. This action enabled the company expand its customer base and the result is that there was an increase in the number of subscribers that paved the way for streaming of services that cater for changing consumer needs.
During initial stages of its development, the company also had to consider a number of environmental that would affect the marketing of its products. For instance, it was observed that most customers for its DVDs were young members of the population while the elderly generations were the least likely to buy the products from the company. As a result, advertisement strategies were devised that enabled coverage of more youths than the elderly generations. The other factor that had to be considered in devising ways of improving the sales of movies is the impact of technology. There was low advancement of technology in certain areas that were considered potential hub for Netflix products. Marketers could not reach a wide range of customers because of low levels of information and communication technologies. Consequently, most DVDs and movies could not be sold effectively due to inability of most users to understand the functionalities of a number of technologies that used products from the company.
Comparative Financial Analysis
A number of ratios have been used to perform comparative analysis for Netflix that enables measuring of growth, profitability, liquidity and efficiency. Under the parameter of growth, the annual sales growth of Netflix and other competitors are found to be at a rate of 40.3 per cent. On the parameter of profitability, it has been found that the average gross profit margin for Netflix is 53.6 per cent, a value that is comparatively lower than other competitors such as Comcast that has a profitability of 67.7 per cent. The leverage of Netflix is calculated by finding the debt-to-equity ratio. It is found that the industry has an average leverage ratio of 1.60. When compared with other companies, it is found that Netflix does not leverage most of its business. Liquidity ratio is determined to establish if a company has low credit risk. The Liquidity ratio of Netflix is currently 1.92This implies that it has a low credit risk in comparison to other companies such as Comcast or Blockbuster that have liquidity ratios of 1.02 and 0.48 respectively.
From the balance sheet in the appendix, the following ratios can be calculated.
Current ration = Current assets/Current liabilities
From the attached balance sheet (Appendix pp.9&10), you will find the total current assets and current liabilities for the first quarter this year ended 31 March 2013 as 2557100/1688714 = 1.514
This ratio is used to indicate the firm’s ability to meet the current financial obligations. As such, Netflix management appears to be keen to ensure that the firm’s current liabilities do not go beyond what the firm can be able to meet in the short run. A current ratio of 1.5 is reasonably safe for the firm operating at any stage of growth. This ratio is important as indicator of liquidity position of the firm. As a matter of fact, it’s one critical ratio that lenders are concerned with for certainty of getting their funds back. This is not only important to the financiers but also the shareholders who are concerned with the going concern of their company.
A current ratio of 1.5 is an indication that, Netflix has worn the confidence of its financiers. This appears to be a strategic position by Netflix given the increasing need for firms to expand and compete worldwide in the global economy. These liabilities are important because of their ability to meet the urgent needs that arise in business operation. In the observed economic dynamics such as the global recessions among other occurrence, it’s important to maintain a position that allows a firm to raise funds whenever required. In this regard, Netflix has maintained a position that reduces exposure to financial risks. In addition, a current ratio of 1.5 means that the firm is in a going concern position, a situation that increases public confidence and hence may help in maintaining the current shareholders as well as creating a pool of potential shareholders who may help expand the firm when necessary.
Identification of Environmental SWOT
There are certain strengths of Netflix that makes it operate competitively in its operating environment despite the presence of high competition from its competitors. There is a high possibility of switching between suppliers because costs of switching is moderately low and there is the possibility of creating an alternative channels. This results into a small network/learning impact that has the capability to derive more power from supplier and pass it to industry leaders. The company also operates in a highly diverse industry where there are a number of different segments. Each segment depends on a number of channels of distribution that enable greater efficiency of many distribution channels. Furthermore, Netflix has the ability to benefit from a consolidated industry where there are many firms operating in a number of segments. Due to the increased number of competitors and the different number of segments there is a high neutrality of the consolidation process despite the existence of competitors.
In the industrial environment, the Netflix organization experiences a moderate level of threat from new entrants. Initially, huge capital is a requirement when venturing in this market. Therefore, huge capital requirements and distribution channels establish barriers to entry. Nevertheless, it is an enticing market which appears effortless in adoption of streaming services. As mentioned earlier mentioned, enormous capital is required especially for the huge investments in content acquisition, procurement costs, and licensing fees. Therefore, the market allows solely those that have significant capital. Moreover, the distribution channels are solely accessible to fully developed internet retail organizations. In the business environment the power of suppliers is highly regarded. Basically, information is the chief input source of Netflix organization’s business and the managers maintain control licensed supply of television movies and shows. The suppliers’ bargaining power is enhanced by the strong strategic associations in Hollywood and the few industry-known and highly regarded content suppliers. Still, the power of buyers is also highly regarded especially because of their high bargaining power. The Netflix organization’s business is commonly boosted by the customer sales. This means that the organization highly relies on the demand and loyalty of its customers. In this market, there are various types of entertainment offered to the consumers. Clearly, television and movies are among the various forms of entertainment.
Still, the Company realizes low switching costs thus considers switching to other entertainment alternatives as rational. The Netflix organization experiences limited threat of product substitutes. There are numerous options present for viewing television and movies that may have a higher aesthetic value because of perceived quality or lower costs. Moreover, the ancient television set still holds a dominant position in the society because of familiarity, personal choice, and habitual behavior. The Netflix organization exists in a highly competitive environment with numerous rivals from the movie rental organizations and pay-TV service providers. The current technology liberates organizations to easily mimic Netflix’s content delivery formation. Netflix highly benefits as an initiator in this niche market. However, it may lose its place because other organizations are highly privileged due to their financial state and organizational formation. Therefore, Netflix faces intense competition in the industrial environment. It faces competition from both the international and domestic markets.
The existence of high population in the US that has a high demands for entertainment products such as DVDs and movies provide a better customer base for products produced by Netflix. This has the potential of improving the sales of its products to satisfy the lifestyles of these inhabitants. This is a good opportunity that will create a possibility for the company to improve its sales of movies and DVDs. The other area that will create an opportunity for the company is the possibility of partnering with other studios such as Walt Disney, Warner Bros and Paramount. The partnerships with these studios create an opportunity for the company to provide a range of selection of movies and shows. It will also enhance the capacity of the company to deal with a number of regulatory policies such as the Video Privacy Protection Act that prevents revealing of customer information without their consent. The other opportunity for the company is that it intends to diversify its offerings and stat its own production company. This will reduce the costs involved in acquiring licenses from producers (Netflix Case Study, 2012, p. 3.
The possibility of amending the legal system of the US copyright law to limit the distribution and sales of DVDs and movies is considered a threat to the process of expanding Netflix. This action will result into a limited number of these products despite the possibility of a high demand. The company will also have to limit the number of products it produces to avoid high level of unsold stock of its products. This will inhibit the capacity of the company to attain its maximum potential in the sales and distribution of DVDs and movies to potential customers. It will also result into restricted profitability and it will not be able to provide employment to most people who are seeking jobs in the company.
The other weakness of the company is that supplier power is generally unattractive force in the industry in which Netflix operates. This is because the main traditional film suppliers such as Buena Vista, Warner Bros and 20th Century Fox are not well established. Furthermore, there is unattractiveness in product differentiation, that has a direct impact on the demand of the industry for the same products and services. The other threat experienced by the company is that there is the possibility of forward integration brought by allowing incumbents establishing control over customer base and distribution channels. In spite of the change in distribution strategies towards a media that enables for immediate viewing, there is low possibility of Netflix to eliminate distributors because of rental revenues, and lack of competency of communication technologies. High dependence of the company on studios for their particular, unique products and high opportunities in the cases of sales of tickets, merchandise and hardcopy sales is less attractive in terms of profit generation.
The Netflix organization is determined in sustaining profitability in a progressively more competitive environment. In the United States of America, Netflix organization retains majority of the subscribers thus maintaining its dominant place in the country. The Company cannot afford ignoring the capability of its competitors especially the small players. It developed a strategy of intensifying associations with the content providers. Basically, the Netflix organization aims at strengthening deals with film and production studios so as to facilitate the process of obtaining licenses. This also aids in negotiating rational prices. Netflix also focuses on experiencing different and dynamic consumer demands and choices. In an instance, the Company should make a decision as to whether it should eliminate DVD mailing operations because of its significant costs and lose a large portion of consumers. Still, the organization developed a strategy that will aid in the maintenance of current market (Goldfayn, 2011 p. 31).
Netflix intends to reach a subscriber base of 72.2 million subscriptions than any other entertainment industry in the U.S. It intends to create a dominant position in the U.S market. Strategies are being made that ensure high profitability and competitiveness in the operating environment is achieved. This is intended to be achieved through production of excellent products and services and intensive campaign for the purchase of its products. Profitability is also intended to be achieved through charging fare prices for its DVDs and movies in comparison to its competitors.
The company also intends to benefit fro its macro-environment such as converging technology to create opportunities within the industry. The use of technology is intended to enable provision of services that provide a range of selection strategies that enable selection of titles whenever there is s demand from consumers. Netflix intends to achieve this by partnering with hardware providers such as TiVo, Roku or MSOs to establish a distributional network that enable it get a greater share of the market. It will also be better placed to benefit from contracts with hardware suppliers, an action that has not been executed but has the potential to reduce the effect of competition when there are many consumers and enable uncontrolled development of customer-supplier relationship between renters and distributors.
The other strategy of the company to improve its position in the entertainment industry is to strengthen relations with content providers. By strengthening the relationship with content providers such as film and production studios, it will be possible to facilitate the process of acquiring licenses and enable the company to negotiate fair prices.
The strategy of saving money spent on operations will be reduced by lowering capital costs by saving money from not having to build physical stores. The company intends to father reduce its ownership of property thus increasing its potential for investments by use of cash that is not expended on plants, property or equipment. The costs of inputs are intended to be reduced by reducing the costs of acquisition of titles. This will contribute towards an increase in its profit margins.
In addition, it has been necessary to ensure customer demands and preferences are met. Strategies have been formulated to accomplish this objective. For instance, it will be possible to reduce operational costs in mailing business such as sending DVD and also enable the company provide its customers with discounts. Most customers prefer that online streaming should have a comparable list of titles in a similar manner to the DVD rental entity. The company intends to align its customer satisfaction strategies to ensure this objective is achieved.
Netflix also intends to ensure its sustainability in the movies and DVD industry by increasing its subscriber base from the current number of subscribers to a number that creates an assurance of its profitability despite the possibility of low demands for its movies and DVDs. The process of attracting customers is intended to be achieved by creating a valuable customer experience of selecting and viewing a collection of the right TV shows and movies. The process of attracting more customers will ensure most households that value its services are attracted and the company benefits from the price they pay.
Strategic Alternative Implementation
Basically, Netflix organization should implement strategies which will enhance its business growth. The organization has made necessary plans to acquire the capability of streaming movies directly onto chief gaming systems such as Play stations, Wii, Xbox 360. Still, Netflix Company should arrange agreements with the main video game firms to offer an opportunity to rent out video games through streaming them onto customers gaming system. This strategy would attract those individuals uninterested in movies but are interested in games. The Netflix organization should also implement and govern online streaming. This is because the popularity of internet has highly elevated. It has become vital in all aspects of the daily life.
Hitt, Ireland and Hoskisson (2013, p.315) raised a legitimate question about how Netflix can maintain profits in the face of increased competition and costs. They argued that if Netflix move into the international arena be wise considering Netflix has yet to explore that market and illegal downloads become a bigger issue as Netflix may have millions of subscribers across the globe.
But how to successfully tap the market will depend on how well it capitalize on its current marketing achievements while seeking to comprehend the diversity of the global market. In particular, uses of computers, TV, smart phones and tablets have provided a great boost to the Netflix content contribution. The ubiquitous platform build to deliver premium video content has been a major breakthrough that gives the company a competitive edge in the competitive market. Capitalizing on this single most achievement will give the company an easy time to access greater market through a distribution ubiquity that facilitate access through smart phones. For instance, a shift from DVD-by-mail business into streaming of the video content has been constrained in the amount of content that could be streamed compared to that of mail. Though the company was still able to promote its product it served its drawbacks. As such, Netflix requires continuing with the improvement of its platforms to enable it secure adequate market share in the competitive environment.
Apart from accessing the greater market by use of streaming rather than mail, the company was able to create a direct link with the customer which was able to help get the complaints from customers directly. This gives it an added advantage in the sense that, by getting complaints directly, the company is able to devise measure to address and solve customer problems and hence increase customers’ loyalty a factor that is critical in a competitive market. This as well gives it an alternative to capture new markets by creating a leeway within which expenditures can be incurred to understand the potential customers’ need. Given the reality of the shift from DVD to streaming, the company needs to maintain a competitive research and development department to help project other possible changes that may affect the future operation of the business.
The other strategy that Netflix intends to implement is to counteract competition from its competitors such as Amazon.com by streaming catalogues that offer latest contents and enabling subscribers to rent and buy digital movies and TV programs at an additional fee. The competition from Apple TV is intended to be counteracted by capturing sections of the market through one-time movie and television purchases. Netflix also intends to counteract the competition from Hulu.com by providing free streaming services and services based on subscription to enable customers get a view of the available shows that have been aired and also partnering with other television groups to provide contents at a reduced cost by sharing costs of airing the programs. The company also intends to counteract the competition from competitors such as Blockbuster Inc, Movie Gallery and Hastings Entertainment by selling and renting DVD products. It also intends to create ways in which customers can access online content instead of using e-mails and DVDs. This will involve an approach where consumers are able to stream movies online, based on the level of demand.
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