Description
Please just read over my analysis on Netflix and write my an executive summary.
Introduction
We promise our customers stellar service, our suppliers a valuable partner, our investors the prospects of sustained profitable growth, and our employees the allure of huge impact. Netflixs mission to provide a great service for its customers and be a profitable company in order to have a great return for its investors. In 1997, Marc Randolph former Netflix CEO began developing Netflix based on mailing DVDs with funding from Reed Hastings also Netflix CEO. In April 14, 1998 Netflix’s website went live and Netflix was seeking out technology writers and offered them a chance to be the first to write about Netflix and in return they would help Netflix with testing its rental system. This helped Netflix because it provided Netflix the chance to fix any operational issues and also provide immediate access to the technology savvy customers on the launch day. In order to attract new customers, Netflix used electronics manufacturers by convincing them to package a Netflix coupon with new DVD players. The website was created to duplicate the best part of the video experience. Netflix established this by creating personalized recommendation engine which replaced store clerk suggestions and also suggested older movies instead of new releases. This made Netflix unique because it created a reputation of having rare films. In the beginning, Netflix’s business model was based on the brick-and-mortar video stores. In 1999, Netflix began to test different ways to increase rentals, the first concept was Home Rental Library in which Netflix sent six DVDs at a time for a $20 per month subscription and after returning all the discs, customers were able to select six more DVDs to rent. The second concept was the Serialized Delivery concept where Netdlix used per disc rental pricing and allowed customers to make a short list for movies they would like to rent in the future. The test group liked both concepts, as a result, Randolph combined both concepts and created the Marquee Plan. In the Marquee Plan customers were offered four movies for a subscription that cost $15.99 per month. Later, in 2007 Netflix began on-demand streaming service in which Netflix allows subscribers to watch streaming content from their televisions. In 2007, Netflix launched an on-demand streaming service where the website allowed the subscribers to be able to watch one thousand titles on their computers instantly. In 2013, Netflix released House of Cards which was its first original series and followed with other hits such as Orange is the New Black and Stranger Things. By 2016, Netflix had planned to release 600 hours of original content while having 30 shows or films in the production process which had doubled since its 2015 output of content. Relationships with Internet providers became strained because of the heavy network usage, as a result, Netflix launched offline viewing which allowed users to download content and watch it on subways, airplanes, and emerging market countries. Currently, Netflix is a streaming service that is competing against many new rivals such as: REDBOX, HBO NOW, HULU, AMAZON VIDEO, SLING TV, and YOUTUBE RED. “Our core strategy is to grow our streaming subscription business domestically and globally. Netflixs vision to expand globally while also growing domestically.
External Environment
subheadings:
Pick ones that are important
Macro Environment
Political
Economic
Social
Technological
environment al
Legal or regulatory
Industry Environment
The way that average people access entertainment has shifted dramatically. Previously, most people accessed video content most over traditional cable television. Customers could either sit down during a scheduled time slot of the television show, or record the video content to watch it later. With technology companies such as Netflix, allowed consumers to watch their desired
content on demand and can watch their show anywhere with an internet connection which is known as the video streaming market.
Netflix faces a high competitive rivalry in which the main area of competition is in content collection because consumers want high-quality content. The battle over content collection and creation will lead to higher content costs. However, Netflix, Inc. is still a dominant player in the video streaming market and one of its pioneers. Netflix has over 62 million subscribers worldwide. In the United States about 36% of households have a Netflix subscription, compared to Amazon prime 13% and 6.5% for Hulu. Netflix controls about 90% of the domestic streaming video market. Netflix is continuously creating new streaming titles and developing original content to attract new viewers while also trying to keep existing subscribers coming back.
Netflix has a direct competition against Hulu and Amazon since each one is a streaming service that streams movies as well as TV shows and creates some of its own content. Also, Netflix competes major networks such as CBS and Fox which have their own streaming video service available on their websites and apps for streaming devices like Roku, Google Chromecast, Apple TV and others.
Netflix is priced at a premium to its rivals and is under pressure to make sure its higher price is justified using its selection. Netflix costs around $12.99 per month, while Hulu has several packages in which it ranges from $5.99 to $50.99 per month. In contrast, Amazon Prime costs $119 per year or $12.99 per month and has student discounts. This makes the bargaining power of buyers moderate because they are able to choose from a variety of streaming services and they are the ones with the final say in choosing what type of content to purchase and use.
Netflix faces a dilemma when it comes to the bargaining power of suppliers because content licensing can cost a huge price. For example, in 2014 Netflix spent $13.5 million on each episode of The Walking Dead. Netflix can make new content instead of using licensing agreements. However, that creates a risk of original content that is not yet proven to be successful.
The threat of substitutes is moderate because each streaming service that Netflix competes with offers a unique lineup of content that other streaming services cannot duplicate. Also, due to the low monthly fee many household do not cancel a subscription to a streaming services to add another, for example, ten percent of American household are subscribed to two streaming services and 2.6 percent of household are subscribed to three streaming services.
The threat of new entrants into the market is low because streaming business has high barriers, for example, it is expensive to produce and purchase content, as a result, only companies with high content libraries or high capital are able to enter the steaming business.
Currently, the video streaming market is at the growth stage. According to a new report by Grand View Research, Inc. the size of the market is anticipated to reach USD 124.57 Billion by 2025. The extensive usage of online video and the demand for on-demand video is creating the growth in the industry.
Macro Environment
Factors such as inflation rate, savings rate, interest rate, foreign exchange rate and economic cycle determine the demand and investment in the streaming market. Netflix, Inc. can use these countrys economic factors such as growth rate, inflation and industrys economic indicators such as the CATV Systems industry growth rate, consumer spending rates in order to forecast the growth of the industry. The CATV system industry is a cable television system that receives television broadcasts by antenna and relays them by cable to paying subscribers in areas where direct reception is either poor or not possible. This system helps Netflixs streaming service.
There are several social factors that influence Netflixs macro environment. For example, In UK markets, younger viewers are watching less traditional television, instead, they turn to online streaming services such as Netflix. Also, social trends show that many customers are starting to watch video content on their smartphones, instead, of traditional television. Similarly, in 2016 United Stated viewers watched an average of 40 minutes on their smartphones. This shows that consumers are starting to use content that fits into their busy schedules.
There has been a huge pressure on the environment because of the access to data servers that streaming companies such as Netflix have. As a result, global governments are making tech companies pay part of an environmental bill worth upwards of $11 trillion by 2025.
Many users were able to access other Netflix countries through technological work arounds and, in order for Netflix to meet copyright law standards with content providers, Netflix put blockers in place. Due to the limited access some countries that have to Netflix content, it will lower the customer demand to subscribe for Netflix.
Internal Environment
– VRIN, Value Chain, Building Blocks of Competitive Advantage;
Valuable rare
Consistent
Lead to superior efficiency, quality
Tie to frameworks
Resources
Netflixs reputation is a valuable resource because of the exclusive series like House of Cards or Orange is the New Black that provides customers content that is only found on Netflix. Netflix spends an average of $3.5 billion on contents that is rare and valuable. Netflix has internationally expanded to 190 countries. Netflix spends huge amount of money entering a foreign market in order to create consumer interest. Netflix has good reputation in Hollywood which helps Netflix to attract top directorial talent. Netflix has a big selection of series, films and documentaries, as well as an expanding library. Also, the Financial resources of the company can help Netflix invest, expand internationally and expand its library by creating new content. Netflix has high-quality, exclusive content that attracts more subscribers which then enables the company to finance the production of new content that make Netflix unique in comparison to its rivals.
Capabilities and Competencies
Content HR production
Using an algorithm Netflix provides personalized on-demand movies and shows which include old and new content that are easily accessible using an app on tablets, phones, or a website on computers and smart television. Netflix is also known to be very reliable and fast in regards to solving problems that customers may face. Netflix also has a strong marketing position because of its brand name. It also has excellent consumer satisfaction because of the fast assistance and delivery systems it has put in place. Netflix also has strong negotiation capabilities with suppliers.
Netflixs intangible assets such as licensing rights of the content that it streams, partnerships with suppliers and low subscription price help Netflix gain competitive advantage in the market.
Netflixs good streaming quality adds value to the consumer when they are watching the content. The founder, Reed Hastings has made a huge emphasis on Human resources in this company in which they hire talented and analytical people based on their personal qualities and not their level of studies. Involves hiring
The customers opinions and viewing data are analysed and used in negotiations of acquisition of new rights for new content to stream. Netflix provides customers with easy access to movies and television content, while, also offering a large selection of choices by using instant streaming.
Corporate Structure
Netflix is the worlds leading entertainment service with over 148 million subscribers in over 190 countries (Netflix.com). Netflix has gone from a company that was ridiculed for their idea of DVD deliveries to a $133 billion company that creates their own movies and television shows. This growth has led to changes within the company, such as the employee count jumping from 3,500 in 2015 to 7,100 in 2018 (Statista).
Netflix incorporates a flat structure, meaning all the managers under the CEO are viewed equally. This means everyones opinion is accounted for when a decision is made, which makes each opinion just as important. Netflix can do this because of the trust throughout the management chain, but this structure is unrealistic for most large companies. Trust is important because if a manager was to leak important company information, the company could be in trouble and trust between managers and board directors would be lost. Netflixs flat structure is very uncommon because it allows its board of directors to access to information. Most organizations have a hierarchal structure where information is often held from board directors, Netflix sees this as counter productive because it creates an information gap between board directors and managers. According to researchers, directors at most companies generally only meet 4 to 8 times a year in board and committee meetings (Stanford). This shows how Netflix manages to best so fast paced, while other directors meet with board members maybe once every couple of months, Netflix has board members and directors meet at least once a month.
Board members are supplied with a 30-page document before each monthly meeting, this allows for productive useful conversation in meetings. The flat structure Netflix incorporates is very helpful, not only does it quickly make decisions it also helps reverse mistakes with ease. According to an anonymous Netflix manager in an interview with Stanford Business, we would have been much slower to invest so much money in content. There would have been more second-guessing if there wasnt this completely open perspective (Stanford). This is shown in the case with the example of Netflix temporarily moving its DVD rentals to a separate company which resulted to a sharp drop in stock. Netflix quickly reversed this decision and saved face because they were unaware how many people still are interested in DVD rentals.
Netflix has quite a rare system with its flat structure, Reed Hastings sits at the top as CEO with what is now 8 directors under him in the year 2019. Netflix divides their company into eight main functions; Marketing, Communication, General Council, Talent, Product, Content, Finance and Business Development. Other than the CEO no one director is more important than the other. Each department provides a slightly different outlook on Business that turns out to be very helpful when they collaborate to form a decision. Unlike other companies Netflix is open to hearing all suggestions which makes each employee feel valued and allows them to be comfortable reaching out to help. Netflixs flat structure may be better known as a functional organizational structure, unlike a matrix structure all opinions matter and hierarchy does not get in the way of decisions.
Although Netflix has a unique organizational structure the structure is still centralized with CEO Reed Hastings on top with total control over each department. Netflix thrives off their growth strategy which has took them from shipping DVDs to be the leading online streamer in the world. Netflix is successful because they always aim to give their customers the best product, they are capable of. Netflix is very fortunate to have a structure thats fits them so well, in order to have a structure like this correctly it takes a strong CEO who is open to new ideas. This structure has led Netflix to be known as one of the most agile companies.
Something many find so interesting is while Netflix expands globally, it has such a small global presence with only 12 offices worldwide, two of these being in California. However, it makes sense they have two offices in California because California is where much of their original content is created. Lastly, what drives people to Netflix is their great quality control, an outage can happen and the next second they will be right on it to find a solution. This is where having a flat structure is helpful because they can come to decisions and solutions quickly. Which leads to them being coined as an agile brand.
One of the biggest challenges Netflix faces is the fact they are tech-first, Netflix builds their own tools and software in order to maintain control over development. However, at the end of the day this challenge is also what sets them apart from other brands and what leaves them to be highly respected.
Financials
Short-term solvency, liquidy, ratios
Activity ratios measure how efficiently a company performs day-to-day tasks, such us the collection of receivables and management of inventory. We will use the working capital turnover to calculate the activity ratio. The working capital turnover ratio indicated the companys effectiveness in using its working capital. To calculate the working capital turnover, you divide revenue by working capital. Netflixs working capital turnover ratio decreased from 7.79 in 2016 to 5.31 in 2017 and also from 5.31 in 2017 to 4.93 in 2018. In comparison to Amazon.com, Amazons working capital turnover increased in 2016 to 2017, but drastically decreased from 2017 to 2018.
Working capital turnover = Revenue ÷ Working capital
2016
7.79=8,830,669 ÷ 1,133,634
2017
5.31=11,692,713 ÷ 2,203,662
2018
4.93=15,794,341 ÷ 3,206,815
Long-term solvency, or financial leverage, ratios
Solvency ratios are known as long-term debt ratios to measure a companys ability to meet long-term obligations. By calculating the debt-to-equity ratio, you receive the solvency ratio by calculating total debt divided by total shareholders equity. This ratio is used to evaluate a companys financial leverage. By calculating the debt-to-capital ratio, you receive the solvency ratio by total debt plus shareholders equity. This ratio measures the proportion of debt a company uses to finance its assets, relative to the amount of equity used for the same purpose. The higher the solvency ratio means that a company is more highly leveraged which is a higher risk of insolvency. Netflixs both debt-to-equity ratio and debt-to-capital ratio declined from 2016 to 2017 and also from 2017 to 2018. In Netflixs debt to equity ratio went from 2.435 in 2016 to 2.094 in 2017 then dropped to 1.62 in 2018. Netflixs debt to capital ratio went from 3.764 in 2016 to 2.657 in 2017 down to 2.225 in 2018.
Debt to equity = Total debt ÷ Stockholders equity
2016
2.435=6,527,365 ÷ 2,679,800
2017
2.094=7,502,837 ÷ 3,581,956
2018
1.612=8,445,045 ÷ 5,238,765
Debt to capital = Total debt ÷ Total capital
2016
3.764=6,527,365 ÷ 1,733,782
2017
2.657=7,502,837 ÷ 2,822,795
2018
2.225=8,445,045 ÷ 3,794,483
Total Asset Turnover Ratio:
The Total Asset Turnover ratio is calculated by dividing sales over total assets. Netflixs sales in 2018 were $15,794,341 divided by 9,694,135 which equals 1.62. In comparison to 2017 ratio which was 11,692,713 divided by 7,669,974 which equals 1.52. This shows an increase in total asset turnover ratio which means that Netflix was able to generate more sales from its assets.
Profitability Ratio:
A company’s ROIC is defined as net profit over invested capital, or ROIC = net profit/invested capital. Invested capital is the amount that is invested in the operations of a company such as property, plants, equipment, inventories, and other assets. ROIC measures the effectiveness with which a company is using the capital funds that it has available for investment. As a result return on invested capital (ROIC) is the best measure since it focuses on the true operating performance of the company. Netflixs ROIC in 2018 is calculated as Net operating profit after taxes (1,653,360) divided by Invested Capital (17,072,770) times 100 which equal 9.68%. Netflixs 2018 ROIC increased 3.22% in which in 2017 it was 6.46% and in 2018 it became 9.68%. This shows the performance of the company has improved and is effectively using the capital funds that it has available for investment. The figure below presents a five year period that ended on December 31, 2018, which shows the total cumulative stockholder return on the Companys common stock, in comparison with NASDAQ Composite Index, the S&P 500 Index and the RDG Internet Composite Index. This graph is a representation of how Netflix has an advantage in comparison to some of the competitors by having its return higher than the others continuously since 2014.
Figure: 1
Market to Book Ratio
The Market-to-book ratio provides investors a way to value a company by comparing the firm’s market value to its book value. This ratio helps a company determine whether or not its asset value is comparable to the market price of its stock. Netflix had a market to book value rate of 27.41 in 2018 which was calculated as market value per share (328.90) divided by book value per share (12). In comparison, Netflixs 2015 rate was 18.18, in 2016 it was 22.88, and in 2017 it was 34.48. This shows a fluctuation in Netflixs Market-to-book value because of the transition that netflix underwent in expanding globally while also adding original content into their library. Nonetheless, the companys high market-to-book value shows that investors finding growing opportunities for the firm.
Return per employee
Netflixs Return per employee is revenue divided by the number of employees which is calculated as 15,794,341 divided by 7,100 which equals 2,224.55. Netflixs consolidated revenues for the year ended December 31, 2018 increased by 35%, which included an increase of 24% and 53% in Domestic streaming and International streaming segments. This shows that Netflix is gaining customers domestically and internationally.
SWOT Analysis
Strengths
Weaknesses
Opportunities
Threats
Market leader
Monthly fee-raising subscription prices
Lack of similar types of products in the industry
Competitive pressure with other streaming services
Customer responsiveness
Small movie library available
Netflix can expand into sports, news, and reality Television sectors
Customers might cancel subscriptions due to slow improvement and new content
Global domination
Do not own most of movies
Netflix can incorporate social media by allowing viewers to add one another and recommend shows to each other.
Existing content might start to become unpopular
Brand Recognition
Heavily dependent on ISPs
Growth of technology
Competition from other streaming services is rising, such as youtube, blockbuster, Hulu, and Amazon
Affordable pricing
Lack of environmental initiative
Refresh Content library
Changing technology
Pirating concern
Innovation
Huge Debt
Alliances with telecom providers
Competition for known actors to use in new movies. For instance, Netflix competes with hulu and amazon prime for talent.
Efficiency
Unable to add new movies that are screening in the theater
Niche Marketing
European commission is considering implementing a content quota and subsidy pots for national production
Netflix has no commercials
Viewers are unable to properly rate a show or movie because netflix only gives the option of a like or dislike
Expand Customer Base
Amazon begin to offer stand alone video subscription making it a more feasible option for people
Ease of use: Netflix can be viewed on Tv, cell phone, ipad, pc, mac, blu-ray, etc.
Cost of original content
Expansion into China
Disney+ will soon be a threat of new entry since they will be removing all Disney content including Marvel & Star Wars, and is expected to cost less than Netflix
Adaptive Capability (moved digital and was ahead of the curve)
Growing operational costs
New trends in the consumer behavior can open up new markets that Netflix can take advantage of.
The company can face lawsuits in various markets because of different laws that fluctuate in regards to the standards that Netflix must follow.
Strong production/direction crew
Limited Copyrights
Increase number of subscribers
Demand for new content is seasonal in nature
Strategy
Netflixs business structure is more of a flat organization. The fewer levels of leadership or middle management between the executives and employees, the wider span of control. It is also part of the culture of Netflix to be transparent, extraordinarily candid towards each other, obtain only highly effective people, and avoid rules. Netflixs structure also gives the employees autonomy and encourages independent decision-making. Because of Netflixs people over process culture, a flat organization best fits the structure of business leadership for the company. In implementing the dream team approach, it makes Netflix a more fun, creative, collaborative, flexible, stimulating, and successful organization. With consumers, Netflix has manifested into the new generation pop culture with binge watching and Netflix and Chill.
Functional-Level Strategy
In terms of position strategy, Netflix is currently the leading in on-demand streaming entertainment. They are aware of their competitors such as Redbox, HBO Now, Hulu, Amazon Video, Sling TV, Youtube Red, and soon to be Disney+. Netflixs product market scope is mainly online streaming entertainment. In a geographical scope, they are expanding to over 190 countries and ensuring that the countries Netflix is present in caters to the countrys needs in diversified content for a diverse market. In a vertical scope, Netflix has a localization business operations in each country to help strategize the content and oversee those countries. The basis of their competitive advantage are having original content and expansion to new countries.
With Netflixs goal to expanding to over 190 countries and more, it is difficult to centralize a functional structure to just one office in one country. Netflix has functional structures based on geographic. Having a functional-level strategy helps attain high quality, efficiency, customer responsiveness, and innovation. In having regional leadership in each company, it helps customize the scope of strategies in each country based on the customers needs. For example, the US and Europe has their own accounting, marketing, HR, and operations. In doing so will create the basis of competitive advantage. When it comes to value creation, Netflix is between low cost and differentiation. Adding international and original content in Netflix was due to customer feedback. Though there was a drastic decline of Netflix subscribers in 2016, some may think having a functional structure may be the cause of the decrease of subscribers. As you can see through their financials, Netflix was able to increase their subscribers and profits by adjusting their business strategies and implementation.
In terms of direction for the future, Netflixs goal is to obtain sustainable competitive advantage through having relevant content, international growth, and having a good relationship with internet service providers.
Business-Level Strategy
Netflix is between low cost and differentiation. Netflix ensures scale economies to continue be a cost effective service and increase customer retention. How Netflix differentiates from other streaming services are using an innovative cloud-computing platform for efficiency and broadening original content in response to customer demands. Netflix focuses on a broad market strategy to serve across the entire market and using digital marketing such as social media to advertise their services. Netflix is increasing their partnership with studio companies for licensing to expand more content in their services such as movies, TV series, documentaries, and animation. Now that Netflix has gained more recognition for producing original content such as 13 Reasons Why and To All the Boys Ive Loved Before, Netflix has the capabilities to produce and co-produce more content. This allows Netflix to compete with other streaming services and increase their subscribers.
Corporate-Level Strategy
As a corporate, Netflix increases corporate value by creating values for customers by offering subscribers original and new content of TV shows, movies, documentaries, and animation. With subscribers being able to watch Netflix anytime and anywhere, they can also personalize their content viewing through Netflixs new algorithm recommendation system. This improves the accuracy of the subscribers content prediction by 10 percent. With a variety of options to choose from, subscribers are able to utilize Netflix from multiple devices such as TVs, tablets, smart-phones, laptops, etc. Subscribers are also able to download content from Netflix and view offline. With these value creations, Netflix is able to model prices based on the value it provides for their customers.
Looking at the companys overall portfolio, Netflix aims to attract and retain subscribers, offer commercial free viewing without ad-support, and improve costs of licensing higher quality content. At the moment, Netflix does not have sports or stream live events like their competitors like Youtube or Hulu.
International Strategy
Netflixs international strategy is to target on expanding its original content globally and cater to international subscribers. In local responsiveness, Netflix is able to focus on customer taste and local regulations in different countries.
Recommendations and Evaluations
It is important that Netflix continues to gain subscribers and profit financially. In order to keep up among the TV and movie streaming services, the company should consider embracing some new changes. Some alternatives to keep Netflix profitable are expanding to offer a music streaming service and to develop better international insight on policies and regulations to become more successful globally.
One alternative for Netflix to consider is to begin offering music streaming as part of their services. Music streaming services have become a large part of the technology industry. By the end of 2016, around 106.3 million people were subscribed to music streaming services which bypassed the 71 million Netflix subscribers. The numbers of subscribers to these services have only increased it is estimated that nearly 200 million people will pay for a music subscription in 2019. Additionally, Goldman Sachs estimates the music streaming market will be worth $37 billion by 2030. Due to the noticeably bright future for music streaming services, tapping into this industry could be hugely profitable for Netflix.
Entering into music streaming s
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