Netflix Business Environment

Netflix External and Internal Environments
Netflix is a video rental store that was founded in 1997 in Scotts Valley, California by Reed Hasting and Marc Randolph. The corporation’s business model is centered on mailing DVDs to its customers as well as providing online rental of videos. For its mailing services, Netflix uses its 35 warehouses across the United States. Since its inception, the company has continued to leverage on technology to improve its services and offerings to customers. This has contributed to its increased success and profitability over the years despite the changing conditions in its market. A critical component that has contributed to Netflix’s success and profitability over the years is an understanding of its external and internal environment. This paper examines Netflix’s external and internal environments with regards to its general business environment, five forces model of competition, external threats and opportunities, strengths and weaknesses, resources, capabilities and competencies, and future improvements.
General Environment
Netflix operates in the entertainment industry where it focuses on providing video rental services to its customers. Netflix provides streaming media video on demand products and various services including film production, film distribution, and television production services. Since inception, Netflix has developed to become the leading Internet entertainment service across the globe with more than 130 million paid memberships across 190 countries (Netflix, 2018). Through its video streaming services, Netflix’s customers can enjoy documentaries, television series, and feature films in different languages and genres. Therefore, the company’s external environment is the entertainment industry, which is increasingly competitive. Hitt, Ireland & Hoskisson (2015) define the general environment as the wider society that affects an industry and companies within it. The general environment comprises different dimensions including demographic, sociocultural, physical, economic, technological, political/legal, and global segments.
One of the segments of general environment that rank the highest in terms of its influence on Netflix’s operations is technological segment. Technological segment affect Netflix and the industry it operates in through increasing knowledge intensity and the emergence of the information age. Through technology diffusion and disruptive technologies, technology has changed its services from video rental services to providing video streaming services. The company continues to change its operations as technology generates widespread devices and gadgets. Secondly, Netflix’s operations are influenced by sociocultural factors, which play a critical factor in the entertainment industry. These sociocultural factors are brought by globalization, which has resulted in changes in customers’ buying behavior, their watching methods, and perspectives regarding price, quality and time of services.
Five Forces of Competition
Five forces model of competition is an important strategic management tool that is used by business organizations to help identify the most attractive area of operation. To achieve this, the model incorporates several variables and attempts to assess the complexity of competition. Therefore, the five forces model of competition is important to a firm with regards to analyzing and understanding competition as well as identifying the most attractive area of operation in order to enhance competitiveness and profitability (Hitt, Ireland & Hoskisson, 2015). Netflix operations and competitiveness is affected by the five forces model of competition as follows:
Bargaining Power of Suppliers
One of the five forces model of competition that is most significant for Netflix is the bargaining power of suppliers, which refers to means suppliers can use to exert their authority over companies competing within an industry (Hitt, Ireland & Hoskisson, 2015). This is one of the most significant forces affecting Netflix since suppliers providing video content own the content. Therefore, this industry is characterized by high bargaining power of suppliers that require suitable licensing deals and could generate legal issues. The high bargaining power of suppliers is attributable to their ownership of the video content that Netflix needs.
Threat of New Entrants
The second most significant force is threat of new entrants, which refers to identifying new entrants in terms of their potential competitiveness and market share (Hitt, Ireland & Hoskisson, 2015). Netflix’s industry is characterized by low barriers to entry, which have in turn resulted in high threat of new entrants. While the corporation is an industry leader, there is a high threat of new entrants due to the low barriers to entry and relatively weak customer loyalty.
Evaluation
Netflix has addressed these two forces in recent years through developing its economies of scale i.e. making incremental efficiency improvements. As shown in its recent annual report, Netflix addresses the high bargaining power of suppliers through developing licensing deals and addressing intellectual property rights (Netflix, 2017). The company also develops and maintains simultaneous relationships with numerous entertainment sources and continually enhances it technology and content service including developing its own original programming.
External Threats
Given the intense competition in the entertainment industry, Netflix is affected by some external threats while there are also opportunities available to it. Some of these external threats include intense competition due to low barriers to entry, contractual limitations on streaming content, and DVDs competition from companies like Redbox, YouTube, and Blockbuster. On the other hand, the available opportunities include growth of the international market, expansion of the product line such as video games, growing partnership with technology and content providers like Blue Ray and Xbox, and increasing downloadable movie offerings.
Threats and Opportunities
The company should deal with the most serious threat of contractual limitations on streaming content through enhancing its production of its own original content. The recent focus by Netflix to enhance its production of its own original content has proven effective in addressing these limitations and addressing high bargaining power of suppliers (Netflix, 2017). With regards to the greatest opportunity of product line expansion, Netflix should capitalize on its huge market share and economies of scale to develop product diversification. Product diversification would help the company to grow its product and service offerings to customers and capitalize on the potential expansion of the product line.
Strengths and Weaknesses
Netflix development to become the world’s leading Internet entertainment service is attributable to its strengths and ability to deal with its weaknesses, which are parts of an organization’s internal environment (Hitt, Ireland & Hoskisson, 2015). Some of the companies greatest threats include strong brand recognition, affordable pricing strategy and model, market leader, and high customer satisfaction. However, the greatest weaknesses include lack of rights to original content, high cost of original content, poor environmental awareness, and the fact that monthly fee discourages membership from occasional movie watchers.
Strategy
Hitt, Ireland & Hoskisson (2015) state that the identification of strategic dimensions or a set of similar strategies known as strategy groups is critical toward enhancing a firm’s growth and profitability. To achieve strategic competitiveness, a business organization needs to create and implement a value-creating strategy. For Netflix, a value-creating strategy would focus on taking maximum advantage of its strengths and a strategy to fix its weaknesses. To take maximum advantage of its strengths, Netflix should adopt product differentiation, which is an industry-wide approach that would help attract more customers through providing better products or services. Through product differentiation, Netflix should focus on developing unique products or services that can safeguard against a competitor. On the other hand, Netflix should adopt cost leadership strategy to help fix its most significant weakness. Through this strategy, the company should serve the lowest monthly fee and low rental cost for its video streaming service.
Resource, Capabilities, and Core Competencies
Resources, capabilities and core competencies are critical components and the foundation of an organization’s competitive advantage (Hitt, Ireland & Hoskisson, 2015). Resources are combined to create capabilities, which are in turn the basis for core competencies and help to establish competitive advantage. Netflix resources and core competencies include strong financial performance/huge revenues, a wide range of talented employees and chief managers to run the business, over 130 million paid memberships, and a wide range of documentaries, television series and feature films. The company’s capabilities include the ability to provide a wide range of video streaming services and reputation for providing fast services.
Value Chain
Hitt, Ireland & Hoskisson (2015) suggest that it’s important for business organizations to conduct value chain analysis in order to understand parts of their operations that generate value as well as those that do not. Value basically refers to the performance characteristics of a product/service and attributes for which customers are willing to pay. Businesses create value to their customers through effective use of their resources, capabilities and core competencies. Based on an analysis of Netflix’s value chain, the company creates value to its customers through source distribution rights, which enable it to provide more on-demand content to customers. The company continually source distribution centers and establish partnerships with suppliers for physical and digital content to offer high-quality services. Secondly, Netflix also creates value to customer through technology development, which are supported by its research and development activities. Through technology development, Netflix creates value by creating a technology that enables customers to stream high quality content using lower bandwidth rate.


References
Hitt, M.A., Ireland, R.D. & Hoskisson, R.E. (2015). Strategic management: Concepts, competitiveness and globalization (11th ed.). Stamford, CT: Cengage Learning.
Netflix. (2018). Company Profile. Retrieved October 30, 2018, from https://www.netflixinvestor.com/ir-overview/profile/default.aspx
Netflix. (2017). Form 10-K Annual Report. Retrieved October 30, 2018, from http://files.shareholder.com/downloads/NFLX/4336187475x0xS1628280-17-496/1065280/filing.pdf