Netflix's business model, competitive strategies, and market expansion

Netflix Case Study

1. Introduction / Narrative
The purpose of this case study was to provide a systematic review of the relevant literature concerning Netflix, Inc. to identify current and future threats, opportunities and potential strategies. Incorporated in 1997 and with headquarters in Los Gatos, California, Netflix, Inc. (hereinafter alternatively “the company”) is a publicly held, leading provider of syndicated and original entertainment content delivered over a network on the Internet as well as through the mails (White 2016). Besides its headquarters, the company also maintains a number of regional locations in Europe, Latin America, East Asia, South Asia and Southeast Asia together with subsidiary offices located in Singapore and the United Kingdom (Samson 2018).
At present, the company competes through three major business segments as described below: Domestic streaming: This business segment provides streaming content services to the company’s domestic members; International streaming: This business segment provides streaming content services to members who are located outside of the United States; and, Domestic DVD: This business segment provides mailed digital optical discs (DVDs) to its domestic members (Netflix profile 2019). In sum, members of Netflix are able to view original content, including feature motion pictures, television series, documentaries as well as a wide array of other types of television productions and movies on any Internet-connected devices (Netflix profile 2019). In addition, and as noted above, domestic members of the company can subscribe for mailed delivery of DVDs which they can keep as long as they want without incurring late fees, provided, of course, that the DVDs are ultimately returned within the extended due date (Baugher and Shinwon 2016).
As of December 31, 2016, the company reported that it provided streaming services to more than 190 countries worldwide (Netflix profile 2019) and it continues to expand into additional foreign markets (Goodfellow 2015). At present, the company’s subsidiaries are as follows: (a) Netflix Entretenimento Brasil LTDA, (b) Netflix K.K., (c) Netflix International B.V., (d) Netflix Streaming Services, Inc., (e) NetflixCS, Inc. and (f) Netflix Studios, LLC. (Netflix profile 2019). This impressive growth is directly attributable to the company’s guiding principles which are discussed below.
2. Current Guiding Principles
The current core guiding strategy for the company is to maximize the value of its products and services to its consumers and shareholders in order to achieve and sustain a competitive advantage against other major players in the industry in which it competes. This core guiding strategy has been evident since the company’s commencement of operations in 1998 when Netflix’s business model centered on providing online-enabled in-home access to the most popular DVDs using a fixed monthly subscription strategy that allowed consumers to receive unlimited rentals which was in sharp contrast to the business model used by the doomed Blockbuster et al. In this regard, one industry analyst emphasizes that, “The company provided its customers with unlimited rentals at a fixed rate with extended due dates. Hence, when it was launched in 1998, the business model of Netflix was the first of its kind in the world” (Samson 2018, p. 4).
This business model, however, required significant reevaluation during the mid-2000s as the Internet became virtually ubiquitous in its domestic and many international markets, and improvements in processing speeds and bandwidth capabilities made it possible for expand the company’s offerings even further to include online video streaming services to its customers (Samson 2018). It is also noteworthy that this change in the company’s business model was fueled in large part by the explosive success of YouTube combined with declining interest in stored media such as DVDs (Samson 2018). As a result, in February 2007, the company began to provide greater amounts of online streaming content directly to consumers with a concomitant decline in its mailed DVD rentals (Samson 2018).
This shift in focus was accompanied by a corresponding commitment to invest in more original and other types of popular content (Lang 2015), and Netflix invested almost $3 billion in 2014 alone for this purpose (Spangler 2014). The company has been even more aggressive in its investments in content since that time as well, spending nearly $13 billion in 2018, an increase of 35% over its 2017 level of $8.9 billion (Spangler 2019). Current projects also indicate that Netflix will invest a record $15 billion in 2019, with no end in these increased investments in sight (Spangler 2019). Although these sums seem massive (and they are), they are in line relative to revenue with what major television networks that depend on syndicated third-party content spend each year (Spangler 2014).
Some indication of the success of this transition in the company’s business model can be easily discerned from its current status in the industry in which it competes (discussed further below), and Netflix had more than 120 million premium account subscribers in more than 190 countries (Samson 2018). This expanded business model served the company well for several years, but many of the same factors that fueled its initial success combined with less than optimal business decisions have since created some profound challenges for Netflix. For instance, according to Allen and Feils (2014, p. 136):
[Netflix] took advantage of the rapid growth in the DVD rental market, the internet and e-commerce by providing a service that the traditional brick-and-mortar retailers, such as Blockbuster, could not compete with. In 2011, however, a price hike, poor management decisions, changes in technology, and increased competition threatened Netflix, leading to a sharp decline in its share price.
As the analysis that follows below clearly shows, however, this downturn in the company’s fortunes was short lived and Netflix has regained its position as one of the leading actors in the video on demand industry today. Based on this corporate history, a proposed vision and mission statement for the company are provided below.
3. Proposed Vision Statement
A proposed vision statement for the company at present is as follows: “The vision of Netflix is to remain vigilant concerning innovations in technology that will directly and indirectly affect its current business model with a view towards providing continuously improving services to its domestic and international customers.”
4. Proposed Mission Statement
A current proposed mission statement for Netflix is as follows: “It is the mission of Netflix to provide all customers with the best possible products and services, create and sustain a workplace environment that attracts the best talent in the world and deliver the maximum return on the investments by our shareholders.”


5. Industry Overview
At present, the company primarily competes in the global video-on-demand industry (Spangler 2014). The aforementioned innovations in technologies have helped grow the global video on demand industry which was estimated at more than $56 billion in 2017, with a forecasted increase to nearly $94 billion by 2023 for a combined annual growth rate of around 9% (Video on demand market 2019). Besides companies such as Netflix, other actors in the video on demand industry include technology enterprises, television providers, motion picture studios and retailers (Video on demand market 2019). In sum, the video on demand industry focuses on the real-time online delivery of a wide array of entertainment, sports, education, religious and other types of digital content (Video on demand industry2019).
Recent trends in the video game industry, have compelled major companies such as Netflix to keep pace by expanding their offerings and technological capabilities. In this regard, one industry analyst emphasizes that, “Although video on demand was initially in demand for movie access, with the changing customer preferences boosting the demand for TV programs and other contents, service providers had to expand their offerings to other content programmers” (Video on demand market 2019, p. 5). Notwithstanding the brier downturn in the company’s fortunes in 2011 and to its credit, Netflix has succeeded in taking advantage of changes in consumer preferences for online streaming content in ways that have helped it achieve and sustain a competitive advantage, most especially through the provision of original content as well as popular mainstream movies and syndicated television series. Not surprisingly, however, other major competitors in the video on demand industry have also kept pace with these trends and these issues are discussed further below.
6. Competitor Overview
The company’s competition environment is already fierce and continues to grow on an almost daily basis. Besides several well known providers such as YouTube, HBO Now, Hulu Plus and Amazon (Jones and Bechtold 2017), the company also competes against television networks and Hollywood-based motion picture studios including Fox Entertainment, HBO and iFlix among numerous others (Samson 2018). In fact, a casual review of the providers available using the Amazon Foxfire application showed dozens of choices, many of them focusing on specialized content such as music, sports, pictures and so forth. Moreover, Hulu’s library of more than 75,000 episodes in double that of Amazon and Netflix (Wyche 2018). In addition, Hulu also has a growing number of subscribers (17 million in 2017) and plans on including live television broadcasts to its domestic market in the future (Wyche 2018).
Nevertheless, Netflix has increasingly become the “800-pound gorilla” in the room and its competitors are acutely aware of its continuing successes while many others struggle to remain solvent. In this regard, Spangler (2014, p. 32), “Netflix is the big cheese of subscription VOD. There's no argument that the company has built a huge lead in the sector, with millions global subscribers. Now some analysts believe Netflix is on the cusp of cementing its No. 1 position for good with the potential to have monopoly-like control of the market.” While the company cannot afford to rest on its laurels, it is apparent that Netflix is outperforming many of its competitors today, but it is vitally important to keep in mind that industry analysts also lauded Blockbuster’s business model when it was at the height of its success, only to succumb to fundamental technological innovations that rendered its products and services obsolete (Spangler 2014).
7. Competitive Profile Matrix
A carefully completed competitive profile matrix (CPM) provides corporate leadership with some valuable insights concerning their positive relative to their competitors. Based on current popularity, brand image and strength and extent of global operations, a CPM for the company and two of its main competitors is provided in Table 1 below.
Table 1
Competitive profile matrix for Netflix, Amazon and Hulu Plus
Critical Success Factor
Weight
Netflix
Amazon
Hulu Plus



Score
Weighted Score
Score
Weighted Score
Score
Weighted Score

Marketing
0.25
3.50
0.88
4.00
1.00
2.25
0.56

Brand reputation
0.25
3.00
0.75
4.00
1.00
2.50
0.63

Location
0.25
2.50
0.63
3.00
0.75
2.00
0.50

Product quality
0.10
1.00
0.10
1.00
0.10
0.75
0.08

Customer service
0.20
0.75
0.15
0.50
0.10
1.00
0.20

Customer loyalty
0.05
1.00
0.05
1.00
0.05
1.00
0.05

Product range
0.10
0.75
0.08
1.00
0.10
0.50
0.05

Total score
1.00
 
2.63
 
3.10
 
2.06



As can be seen from the results in Table 1 above, although Amazon’s weighted total is highest, Netflix ranks a close second followed by Hulu Plus.
8. Ratio Analysis
The increasing investments in content has inevitably affected Netflix's margins, and the company emphasizes that, “Our view is that an aggressive spend may force other players to reconsider their commitment to this space or to modify their business models” (as cited in Spangler, 2014, p. 24). The company’s earnings per share are depicted in Figure 1 and its historic stock performance are is shown in Figure 2 below.

Figure 1. Netflix current earnings per share
Source: https://www.nasdaq.com/charts/NFLX_epss.jpeg

Figure 2. Netflix historic stock performance
Source: https://www.reuters.com/finance/stocks/chart/NFLX.O
9. Internal Factor Evaluation Matrix
Based on the findings that emerged from the review of the relevant literature, an internal factor evaluation (IFE) matrix for the company is provided in Table 2 below.
Table 2
Internal factor evaluation for Netflix
Key Internal Factor
Weight
Rating
Score

Opportunities

1. New agreements with third-party original content providers
.11
3
0.33

2. Investments in human resources
.09
2
.18

3. Strategic partnerships with current competitors
0.24
2
.48

4. Development of new original content
.10
1
.10

Threats

1. Unplanned turnover of top leadership
0.17
4
.68

2. Poor management decisions (see 2011)
0.03
2
0.06

3. Overextended financial position due to investments in original content
0.26
3
0.72

Total
1

2.49



10. External Factor Evaluation (EFE) Matrix
An external factor evaluation (EFE) matrix for Netflix is provided in Table 3 below.

Table 3
External factor evaluation for Netflix
Key External Factor
Weight
Rating
Score

Opportunities

1. . Expansion into new foreign markets
0.01
5
.05

2. First mover with unexpected innovations in technological capabilities
0.5
5
2.5

Threats

1. Improvements in content and technological capabilities of competitors
0.11
4
.68

2. Downturns in economy
0.03
2
0.06

3. Political/social unrest in foreign markets
0.14
3
0.42

4. Increased governmental regulatory oversight
0.12
2
0.24

Total
1

3.95



11. Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix and Proposed Strategies
A strengths-weaknesses-opportunities-threats (SWOT) analysis and proposed strategies for the company are presented in Table 4 below.
Table 4
SWOT analysis and proposed strategies for Netflix
Category
Description
Proposed Strategies

Strengths
1. Strong brand recognition
2. Expansive library of original content
3. Established distribution network
Continue current investments in original content with a greater focus on educational content

Weaknesses
1. Increasing saturation of video on demand market
2. Complete reliance on existing technologies that may become obsolete overnight
Identify potential new technologies that will have a direct impact on online content delivery

Opportunities
1. Expansion into new foreign markets
2. First mover with unexpected innovations in technological capabilities
Pursue new markets in emerging economies

Threats
1. Improvements in content and technological capabilities of competitors
2. Downturns in economy
3. Political/social unrest in foreign markets
4. Increased governmental regulatory oversight
Perform extensive due diligence prior to investing in new foreign markets to identify potential cross-cultural constraints to programming



12. Strategic Position and Action Evaluation (SPACE) Matrix
A strategic position and action evaluation (SPACE) matrix for the company is depicted in Figure 3 below.

Figure 3. Strategic Position and Action Evaluation Matrix for Netflix
13. Grand Strategy Matrix
A grand strategy matrix for the company is shown in Table 5 below.
Table 5
Grand strategy matrix for Netflix
Rapid Market Growth

Quadrant 2
Creation of new original content
Development of new foreign markets
Quadrant 1
Strategic partnerships with current competitors
Increased market penetration in foreign markets

Quadrant 3
Quadrant 4

Diversification into additional content areas (i.e., education)
Increased market penetration in foreign markets



14. Boston Consulting Group Matrix
A Boston Consulting Group (BCG) matrix for Netflix is provided in Figure 4 below.

Figure 4. BCG matrix for Netflix
Key:
1. Dogs: These are products with low growth or market share.
2. Question marks or Problem Child: Products in high growth markets with low market share.
3. Stars: Products in high growth markets with high market share.
4. Cash cows: Products in low growth markets with high market share
Source: https://www.smartinsights.com/marketing-planning/marketing-models/use-bcg-matrix/
15. Internal - External (IE) Matrix
Penultimately, an internal-external (IE) matrix for the company is provided in Figure

16. Quantitative Strategic Planning Matrix (QSPM)
Finally, a quantitative strategic planning matrix (QSPM) for Netflix is provided in Table 6 below.




Table 6
QSPM matrix for Netflix
Key Factors
Alternative 1: Acquire competitors
Alternative 2: Increased investment in original content


Weight
Att. Score
Total Att. Score
Weight
Att. Score
Total Att. Score

Strengths







1. Strong brand recognition







2. Expansive library of original content







3. Established distribution network







Weaknesses







1. Increasing saturation of video on demand market







2. Complete reliance on existing technologies that may become obsolete overnight







Sum weights







Opportunities







1. Expansion into new foreign markets







2. First mover with unexpected innovations in technological capabilities







Threats







1. Improvements in content and technological capabilities of competitors







2. Downturns in economy







3. Political/social unrest in foreign markets







4. Increased governmental regulatory oversight







Sum weights







Sum total att.









Note: “Att” = Attractiveness

http://www.maxi-pedia.com/quantitative+strategic+planning+matrix+QPSM
17. Recommendations
The research showed that Netflix transformed its original business model to include online video on demand services which has fueled the company’s stellar growth and impressive stock performance since a brief downturn in its fortunes in 2011. Since that time, Netflix has grown in subscriber base and added significantly to its original content programming. Nevertheless, quantity does not equate to quality and the company’s offerings remain suboptimal compared to some of its competitors, most especially HBO Now. The research also showed that like Blockbuster et al., Netflix remains completely reliant on a business model that may become obsolete virtually overnight when the “next big thing” hits the markets. Despite these constraints, the research also showed that Netflix enjoys a competitive advantage with respect to its distribution network and consumer loyalty, attributes that the company can leverage to help sustain its current growth.


References
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