Introduction
Netflix is a movie streaming company that allows people to stream tv shows online for entertainment. The company was founded by Reed Hastings and March Randolph in 1997 and rented its first DVD a year later. Currently, Netflix has subscribers in over 190 countries, although some countries, like China, put restrictive measures against it (Maddodi, 2019). Below is an analysis of Netflix’s current state of affairs and the strategic options available for the company.
For many years movies were sold using DVDs and shared through broadcast television. However, with the rise of the internet, streaming has become the most popular means of watching TV shows. The video streaming industry is expected to grow to $ 149.96 billion by 2024 and $223.98 billion by 2028 (Arturo, 2022). Netflix does not have a clear mission statement because its leaders argue that most companies’ mission statements are vague. However, its implied mission statement affirms its dedication to serving its customers through streaming video services. Reed Hastings, the CEO, states that the company’s objective is to become the best video distribution service globally, with operating licenses everywhere worldwide. The company says it focuses on becoming the best entertainer in the world, implying Netflix could focus on expanding and becoming more flexible.
Companies Competitive Strategies
Since its first activity in 1998, Netflix’s competitive strategies have been spearheaded by Reed Hastings, its founder and CEO. His principles are reflected in the company as it first seeks to build an excellent interface to ensure efficient and easy access to internet content. Netflix always aims to ensure that it keeps improving its services faster than its competitors (Kweon & Kweon, 2021). This growth is achieved by aggressively marketing in new locations where the desired market penetration is yet to be achieved. Another competitive strategy that Netflix has adopted is to avoid getting comfortable with its many subscribers but rather focus on increasing that number annually. For these strategies to be achieved, financing is always important, and Netflix ensures that earnings per share are always increasing, at least in the long term. Netflix has also introduced a system where subscribers can download content for online viewing and is always expanding the number of titles for its clients.
Analysis of External Environment
Netflix’s external environment and internal capabilities can be analyzed using the PESTLE tool, where the political, economic, social, technological, and environmental factors are used. Netflix is affected by different pollical factors since it is an international company (Onyusheva & Baker, 2021). Some countries like China deliberately put restrictive measures against Netflix by denying it licenses to operate in the country. Although Netflix has tried to enter the Chinese market using partnerships with Chinese companies like iQiyi, its revenues have been significantly limited.. Nonetheless, Netflix can still overcome these difficulties largely due to its effective marketing campaign enabling it to enter markets where governments give poison pills.
The economic factors surrounding Netflix have been very favorable in the wake of the COVID-19 pandemic. This is despite many over-the-top (OTT) businesses being launched in that period. Currently, Netflix has the biggest market share, with over 29% of the total revenue generated in the industry (Amoroso et al., 2021). The brand experience and satisfaction have mainly contributed to the dominance of Netflix. This internal state of creating satisfaction is known to create brand loyalty, achieving economic prosperity and sustainable competitive advantage (Amoroso et al., 2021). Other external economic factors affecting Netflix besides OTT are taxation rates, GDP differences in places, wage increases, and unemployment (Dean et al., 2020). However, the company has emphasized using originally produced content, a factor that has increased its operating expenses.
In its operations, Netflix is hugely impacted by social factors that have made people change the way people consume media content. While initially, the company had a market only in developed countries, the change in lifestyle and level of education in developing has made it easy for Netflix to diversify into these markets. The average disposable income globally has also increased, leaving people with cash to pay subscription fees and buy telecommunication devices. People’s buying habits are also changing, and people are more likely to stream movies than use the traditional method of purchasing DVDs in brick-and-mortar stores (Bhatti et al., 2020). Social factors favor OTT companies, and Netflix has altered its internal operations to accommodate these changes.
Netflix is an online company that relies on technology to perform its activities. Movies are transferred through the internet and may easily be hacked without proper security. Netflix payments are also made using various online payment applications, and if proper care is not taken, chances of theft are always high (Dias & Navarro, 2018). The technological environment is always transforming; thus, Netflix should always be keen to identify new technologies. To date, Netflix has been able to keep up with the changes because it gives its customers a chance to give feedback on how their services are.
Netflix is an international company; therefore, before venturing into any new country, it must consider the legal framework of the place. Likewise, since it airs videos from third parties, it should consider patents, copyrights, charters, and other intellectual property rights. Another legal restriction limiting Netflix is a law passed by the United States government prohibiting any US-based company from having operations in North Korea, Crimea, and Syria (Smeltz et al.,). The people’s Republic of China has refused to offer Netflix licenses to operate there, thus making it lose a huge market opportunity. Netflix is an online company that does not directly impact the environment. Nonetheless, it has put measures in place to ensure that the power it uses in its operations is carbon free.
Analysis of Financial Data
This analysis will look at Netflix’s performance from 2000 to 2017 for selected years, and a time series analysis will be used to know how the company performed during that time. A company’s current ratio shows how many times it can cover its current assets. Netflix’s current ratio dropped from 1.77 in 2005 to 1.64 in 2010, to 1.54 in 2015, to 1.25 in 2016, then rose to 1.40 in 2017 (Thompson, 2018). Thus, the ability of Netflix to cover its short-term liabilities is seen to be reducing. It is useless to calculate the company’s quick ratio since, as an online company, its inventory is small and negligible and will not help show its liquidity.
The net profit margin ratio calculates a firm’s profitability by dividing the net income by sales revenue. In 2005, Netflix went a net loss of (58.5) after gaining a sales revenue of 35.9, and therefore impossible to calculate the profit margin for that year (Maddodi, 2019). The company’s net profit margin rose from 6.1% in 2005 to 7.4% in 2010, showing that the cost of sales was lower in 2010. This ratio then dropped to 2.1% in 2016 and rose to 4.7% in 2017 (Thompson,2018), showing that the expenses used to sell a unit have increased for Netflix recently.
The return on equity (ROE) for Netflix shows that the company had a higher return on equity in 2005; 19%, 2010;55% as compared to that received in 2015; 5%, 2016; 1.7%, and 2017; 3.6% (Thompson, 2018). Thus, it would have been better for a shareholder to buy Netflix shares in the mid-2000s than in the mid-2010s. The return on assets shows the same results as the return on equity in 2005; 11.5% and 2010; 16.3% higher than 2015; 1.2%, 2016; 1.6% and 2017; 3.8% (Thompson, 2018). Most of the analyzed ratios show that Netflix’s ratio performance continued to drop from 2000 even though the net income was continuously on the increase.
Statement of Problems
Like all OTT platforms, Netflix faces various problems, such as using the wrong technologies, showing poor and unwanted content, and failing to use censorship. However, the biggest problem facing Netflix today is spending too much to get more subscribers and overreliance on licensed content, which is expensive. Netflix has been overspending, and its net profit margin has decreased (Lozic, 2020). The online movie platform has been spending too much to get licensed firms, while the competitors have been using movies licensed by third parties, which are cheaper and doing just as well as licensed ones. Overspending is a major problem facing Netflix, making it at risk of a negative cash flow in 2018, thus losing its competitive advantage (Diaz & Navarro, 2018). This overspending problem has been selected because its main competitors, HBO, Hulu, and Amazon prime, are unaffected.
Strategic Alternatives Available
One of the strategic alternatives that Netflix has is diversification. One of the markets that Netflix could diversify to is the gaming industry—diversifying into games is feasible since they can be paid through subscriptions, just like the movies. Diversification has an advantage in that it could increase the market share and lower the risk of losses. Nevertheless, it also has disadvantages both at the corporate and Strategic Business Unit (SBU) levels because it could make the company require additional capital and, thus, more debt (Leković, 2018). On the other hand, Netflix can use divestment as its strategic alternative and remove many of its diversified holdings from its portfolio. Divestment is a feasible strategy for Netflix since it could help the company focus on one major thing. The advantage of divestment is that it could help the company lower its operating costs and remove unproductive businesses. However, divestment puts the company at a huge risk of total insolvency should its main activity fail.
Another strategic alternative available for Netflix would be the growth strategy. Organizations that use the growth strategy focus on growing at the same rate as the industry (Ramdani et al., 2018). The advantage of assuming a growth strategy is that it would enable the organizations to give products not seen before. Adopting the growth strategy would, however, invite much pressure from investors leading to poor decision-making. Nevertheless, strategic product development has numerous disadvantages, one of which is the high cost of developing a more advanced software. It also could confuse the customers used to the older version and thus make their navigation slower. Of the four strategies, the best to assume would be the product development strategy because it would ensure that Netflix continues to offer satisfaction to its clients and thus maintain its status as the market leader.
Implementation Plan Recommended for the Company and Challenges
Netflix has an implementation plan to enhance its software so subscribers can view the movie’s length before watching it. This plan will serve to improve the user experience by avoiding disappointments in the end. It will also serve to enable the viewer to plan their schedule. This plan has challenges since it will necessitate more powerful software. Viewing movie previews also reduces clients’ will to watch the whole show (Russell et al., 2017). However, the challenges of improving the user interface will likely help Netflix maintain its leadership as the main streaming platform.
Evaluation and Control Plan
Netflix can be evaluated using both qualitative and quantitative data. The strategy and its implementation can be assessed by using the number of hours a user will spend while streaming and the will to pay for new subscriptions (Hieu & Nwachukwu, 2019). Qualitative evaluation can be done by asking the clients their satisfaction levels and asking if they would recommend Netflix to a friend. A control plan to ensure how the product development is going can be set by looking at the market penetration and market share.
Conclusion
Netflix has been for a long time growing, but financial data and PESTEL analysis show that the company is at risk of failing. To prevent this risk, the company should adopt the best strategic alternative, in this case, product development. This strategy is to be implemented by making a better user interphase where a customer can preview the length and scenes of the show. Evaluation and control should then follow for the management to know how the implemented strategy is doing.
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