Netflix Final Case Study

May 8, 2017
BUSI 4940
Dr. Gaffney
Andrew Alig
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Table of Contents

Executive Summary................................................................................................................2
Analyzing the Environment
P.E.S.T Analysis.............................................................................................................3
5-Forces Analysis...........................................................................................................3
Drivers of Change...........................................................................................................4
Key Survival Factors......................................................................................................4
Overall Analysis of the Environment.............................................................................5
Current State of the Firm................................................................................................6
Strategic gap analysis, and strategic proposal for the firm
Operational Performance................................................................................................6
Organizational Health.....................................................................................................7
Capabilities.....................................................................................................................8
Environment vs. Strategy...............................................................................................8
Organizational Gaps........................................................................................................8
Identification of Key Issues............................................................................................9
Conclusions.............................................................................................................................10
Table of Figures.......................................................................................................................11
REFERENCES........................................................................................................................11
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Executive Summary

Netflix is the worlds leading internet television network. Currently, Netflix has 93
million members in over 190 countries that watch movies, television series, and documentaries.
Below the PEST analysis and Five Forces analysis will help to initially analyze the environment
which Netflix operates in. Then, drivers of change and key survival factors will be analyzed to
get a better understanding of the forces behind the industry and the environment that has been
created. This will lead to a five year projection for the internet television network industry as a
whole to determine the attractiveness of the environment. Next, assessing the current status of
Netflix as a company and reveal how their mission and vision is correlated with their strategy.
Which will then proceed to observing Netflixs operational performance and health to give
background information on how Netflix has been producing from a financial perspective. Then,
the major capabilities that Netflix holds will help to provide information on how to move
forward as a company. Lastly, delving into how Netflixs strategy combats the current
environment and determine where Netflix has the opportunity to strengthen potential gaps.
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Analyzing the Environment

When addressing the internet television network industrys environment, looking at the
broad aspects that make up the main elements will help to gain an understanding of how Netflix
operates. As an industry there are many aspects that that make up the home entertainment as a
whole, Netflix has been a steadfast growing and ever-changing company that has adapted to the
needs of its consumers. In order to see what factors or aspects that mostly affect the home
entertainment industry, the PEST Analysis and 5-forces Analysis will be used to give a
breakdown of how this industry operates.

P.E.S.T. Analysis

The political factors in the internet television network industry are shown to be highly
important. Political aspects involved in this industry include adhering to certain policies,
licenses, and privacy rights with all parties involved in the business. The political stability within
the industrys environment play an important part in whether or not people chose to start a
membership. Economic factors mainly include the pure competition of the market and aspects of
economies of countries of potential expansion. Economic growth or shrinkage can significantly
affect this industry because this can either open or close potential activities. Constant or sudden
inflation of the economy would lead to consumers being able to afford any sort of membership or
subscription. The economic factors involved have a medium to high effect on the industry. The
social forces on the industry are medium to high because of the viral nature of social media could
either make or break any business. Lastly, the technology factors of the industry are at a new
high within the past two decades. People want their movie viewing pleasures to be easy and
accessible. Within the past year alone there have been advances from only available on limited
devices to now a whole array of devices. How easily accessible and convenient are the most
important factors to the consumers of this industry. As the industry continues to grow technology
will become an even bigger factor in this industry.

5-Forces Analysis

Porters Five Forces analysis is a framework used to analyze the attractiveness and
competitiveness for a certain industry. The internet television network industry has a very limited
threat of substitute resulting in a low force. The products for this industry are movies and
television series which leads to the conclusion that the only substitutes are in theater IMAX
experiences and books or any other online form of entertainment. The Threat of Potential
Entrants is low to medium because there is limited room for competitors to enter this industry.
These new entrants are usually smaller and more specialized or focused on a certain
demographic/genre. Entering this industry comes with major barriers to overcome such as having
substantial capital and certain rights and licenses to the products. Industry Rivalry is a high force
because all companies in this industry tend to sell the same products, but their main method of
differentiation is by offering slightly different methods of delivering the same product. This
rivalry can extend to their social media presence and supplying not only online options, but also
offline options too. Buyer Power would be considered a medium force mainly due to buyer price
sensitivity and bargaining leverage/degree of dependency. Buyers tend to follow the companies
that give the best bang for a dollar because of consumers tend to be very economical with their
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finances. Also, buyers will tend to have bargaining leverage by joining with companies with the
lowest fixed prices and the fact that there are multiple channels of distribution tend to give the
buyer power. Supplier Power is low, because DVDs and purchasing physical copies of these
products is outdated leaving them with limited options within this industry. So suppliers raising
their prices would have little to no effect on the industry.

Table 1: Top-3 Forces in the Broad & Competitive Environment Rankings

Source Force Detail on the Force

Broad environment Technological force Provides significant impact on competitive pricing

for suppliers and accessibility for consumers

Broad environment Virally Social Social media impacts this industry by either
establishing positive or negative PR

Competitive environment Competitive Rivalry Internet television network providers have a highly
competitive and highly changing environment

Drivers of Change

1. Technology Development - Content-delivery networks help to provide consumers with the

best and the quickest delivery of internet television products. Also, there are advancements in the
recommendation and prediction software of the industry that can help consumers easily find
content that is similar to what they have previously enjoyed. Companies in this industry have
also made strides in making the internet television products available on a variety of personal
devices, not just computers.
2. Threat of substitutes - With a multitude of substitutes in the internet television network
industry there are many different alternatives for consumers to choose from. These alternatives
include piracy and cable/satellite networks. These substitutes either deliver products for free or
are specialized in offering a wider variety of products or a specific genre.
3. Overall wealth of the economy - The overall wealth of the economy depends on the
consumers purchasing power. In a healthy economy, capitalism is can be successful when the
system of buying and selling things, which ultimately is contingent on the ups and downs of the
market. In a recession, a consumers purchasing power becomes paltry while in an economic
boom consumers purchasing power is strengthened by the upturn of the market and the industry.

Key Survival Factors

1. Ability to Maintain Positive Relationships with Content Providers In order to for

any company to be successful in this industry, they must maintain a very good relationship with
studios and content providers that license the products to these companies. If a positive
relationship between the companies and content providers can continue then the companies will
receive the products they desire in a quick and efficient fashion. If the relationship turns
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negative, companies could be left out when certain products become in high demand, leaving the
companies far behind their competition.
2. Ability to Deliver Products with Speed and Efficiency In the internet television
network industry, all companies must pride themselves on the speed and quality which they
supply their consumers with products. Some companies sacrifice speed with which they make
products available in order to ensure quality is the dominant aspect of their business. Others may
tend to have newly released products out quicker, but their quality of service will lack in other
aspects of their business.
3. Utilizing technology In an ever-changing world, technology has become one of the
most prevalent and revolutionizes all industries including the internet television network
industry. This growing technology raises the accurateness of internal controls and provides a
means to make decisions faster and better educated. There are countless ways technology can
increase productivity within the internet television network industry and these companies should
take full advantage of what each type of technology has to offer.

Overall Analysis of the Environment

The internet television network industry is attractive, competitive, and always changing.
The constant evolution of technology has created ways for companies within this industry to
deliver their products in creative and fashionable methods. Netflix prides itself on being able to
provide their customers with products that are easily accessible, quick and quality based, and
provides a recommendation system to provide customers with similar products they may like. A
majority of the competition today in the internet television network industry are smaller, web-
based companies that revolve around a short term commitment. The following shows some of the
top companies within the internet television network and where they are projected to be when it
comes to subscriptions:

(in the millions)

http://media.digitalnewsreport.org.s3.amazonaws.com/wp-content/uploads/2016/01/Netflix-growth.png

Overall State of the Firm

1 http://digitalnewsreport.org/publications/2016/predictions-2016/
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As the worlds leading internet subscription service Netflix established their mission in their 10-
K2,

Our core strategy is to grow our streaming subscription business domestically and
globally. We are continuously improving the customer experience, with a focus on
expanding our streaming content, enhancing our user interface and extending our
streaming service to even more Internet-connected devices, while staying within the
parameters of our consolidated net income and operating segment contribution profit
targets.

Their mission highlights three of their main core values, which can be found on their official
public company website3: passion, productivity, and creativity. Firstly, passion is a pillar that
helps to establish an atmosphere of ingenuity and truly caring about putting out the best Netflix
has to offer. Netflixs standard of passion will show consumers that Netflix truly cares about
bringing forth their best and that there is a true sense of desire to put Netflixs best foot forward.
Then, Netflixs value of productivity essentially means that they will continue to improve
customer experience, expand their content, and enhance their user interface without jeopardizing
their income. Netflix will continue to produce their top notch business model and continue to
serve their consumers with their best efforts. Lastly, creativity helps Netflix to think on their feet
and find new ways to bring in revenue and attract many different demographics to join with
subscriptions.

Operational Performance

2 https://ir.netflix.com/secfiling.cfm?filingID=1628280-17-496&CIK=1065280
3 http://netflixcompanyprofile.weebly.com/
4 https://ir.netflix.com/secfiling.cfm?filingID=1628280-17-496&CIK=1065280
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When compared to another competitor, Hulu. Netflix receives 3.5 stars on Apple Store, while
Hulu only receives 2.0 stars. The overall financial strength is healthy and vibrant. Although
revenue consistently increased, operating income increased compared to year 2015. Also, the
yearly growth rate is relatively high. Netflix should continue to grow, but there is always a
chance that the financial structure of a company like this may remain stagnant.

Organizational Health

Netflix begins its organizational health by taking extremely good care of its salaried
employees by giving them unlimited vacations, can expense without initial approval, and do not
have yearly performance reviews. Netflix prides itself on focusing its hiring resources on finding
fully formed adults who are able to step in to the position and begin to work without much
training. Netflix had a small bump in the road during 2014 because their competition began to
catch up, therefore, Netflix adapted and began to produce its own Netflix Originals which
helped to spark a new revenue generator. Simply put, Netflix hires the best people available for
the positions that are open and then expects those employees to be able to take the helm and
make the best judgement decisions. Netflixs overall organizational health is good, as well as
their operating performance.

Capabilities

5 https://ir.netflix.com/secfiling.cfm?filingID=1628280-17-496&CIK=1065280
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Business Capabilities Contributing Elements

Type Description Firm Management Organizing

Resources Preferences Processes

Operational 1 Ability to become the Operations: Driven Strategy: Top down

profit-driven stick to what decision making
Capabilities leading provider of accounts works and remain processes
internet television content loyal
and the fastest deliverer Financial:
profits enable
of said content. growth

Customer 2 Ability to enable the Operations: Driven Strategy: Top down

Capabilities customer with a direct
and genuine relationship
at a reasonable price
gives customers create positive decision making
superb customer outcomes that processes
service result in customer
satisfaction and
gratification

Innovation 3 Ability to develop and Product/PD: Driven Strategy: Top down

Capabilities offer products to a
various demographics of
consumers
a mixture of take smart profit decision making
readily available bearing risks and processes
internet television become a leader
content on a of innovation
multitude of
personal devices
at a fair price

Environment vs. Strategy

Netflix does a great job aligning their strategies to the environment. One of the drivers of
change Netflix and the industry experiences license agreements with content providers. This is
nothing new to the industry, but it is a gap nonetheless. To decrease this gap, Netflix decided they
were going to create and develop their own products to offer to their consumers which would be
declared as Netflix Originals exclusive to Netflix members. They are also lessening the gap
between them and the threat of substitutes with this solution by keeping customers from using
alternative internet television providers. Netflix also needs to continue the use of more
technology to attract more consumers to use their services. The technology behind providing
consumers with their product needs and helping consumers discover new products by using
consumers product history.

Organizational Gaps

Netflix is currently a major company in the internet television network industry.

Ultimately, Netflixs success has been the product of strategic planning and positioning. Their
market strategy has been unwavering pillars that have resulted in their most important survival
factors. Their commitment providing products at top quality and speed, revolutionizing the
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internet television market, and establish greats services at a reasonable price model. A potential
Organizational Gap that Netflix might struggle with is their ability to provide their services and
products under constant threat of substitutes and threat of competitors. Another potential gap
would be the industry coming to a standstill when it comes to ways to revolutionize internet
television. Currently, internet television primarily has to wait till major movies are out of
theaters before being able to provide them. Netflix must consider working with these studios and
content providers to get newer and more recent products available for their consumers.

Identification of Key Issues

Like most companies in this industry, Netflix will have key issues that will need to be identified
and addressed. These key issues consist of other alternatives such as piracy, studios refuse to
license streaming content, and technological breakdowns or technology not performing up to
expectations. These issues are crucial because these issues do not only bring on the surface
problems, but a much deeper problem that affects the entire business model. The problem Netflix
would face if these issues were to become material is as an internet television network, Netflix
depends on technology to supply their consumers with their products. Also, as a content provider
if there is limited to no content to provide then consumers will back out of contracts and leave
Netflix. Lastly, Netflix will always be faced with the threat of competition with piracy because
consumers will be able to obtain their content for free.

Piracy

Piracy will always be a potential threat not only to Netflix, but also to the internet television
network industry as a whole. The industry already is highly competitive and constantly changing,
and with the addition of piracy, this only further complicates the industry and Netflixs
competitive outlook. Piracy threatens to damage Netflixs business at its most fundamental level
because it virtually offers the same products and services for free. Piracy not only affects
Netflixs plans for national growth within the United States, but also internationally. While
piracy may be an attractive option for some, because it is illegal many consumers will choose to
not risk potential legal lawsuits and fines. Therefore, even though this threat of competition is
pertinent and constant, this threat should only be considered low to moderate.

Licensing Agreement

Netflix depends its business on being able to provide its consumers with movies and television
series through the internet streaming capability. In order to do this, Netflix depends on studios
and content providers licensing rights to be able to distribute the content. If studios and content
providers decide to no longer license with Netflix or provide acceptable terms to both parties,
then Netflixs costs would significantly increase which may lead to an increase of prices for
consumers to cover costs. The music within the content that Netflix provides requires to obtain a
license for such distribution. Therefore, Netflix must negotiate with collection management
organizations (CMO) that hold certain rights to these music contents. If unable to reach terms
with these CMOs, then Netflix will become involved in litigation over distributing certain
content. Netflix heavily depends on these rights and agreements to be made in a timely and
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orderly manner. While this issue may not be considered to be active this issue should be handled
carefully and considered a high to moderate risk.

Technological Failure

Netflix obviously uses multiple forms of technology in order to make the internet television
streaming possible for their consumers. Also, their technology includes the software to be able to
recommend and sell their content as quickly and efficiently as possible to their consumers
devices. Netflix has developed their own content-delivery network (CDN) which could
potentially be hindered by Internet Service Providers (ISP) not interconnecting causing
difficulties and leaving the delivery system inefficient and negatively affect the business. Netflix
uses third party technology, as well as its own, to help market their service, payments, and daily
operations. If these were to fail, Netflix could experience the operation working improperly and
making retaining current members and adding new members nearly impossible. Lastly, there is
risk of Netflixs software potentially causing any damage to their consumers personal devices
which would cause operational failure and potential financial losses and restitutions. Netflix
almost exclusively uses technology to make their services available, which means this issue
would have a high significance, but with Netflix investing so much into making their technology
top tier the risk associated is moderate.

Conclusion

The internet television network industry is competitive and quickly evolving. Netflix
must keep being innovative to prevent from falling behind competitors who are ready to strike
the target on Netflixs back. In order to continue to stay ahead of the competition Netflix must
continue to pursue new methods of attracting members and avoid losing consumers to piracy
sites and competitors. Netflix, as a company, is solidly built and was created on the principle of
giving consumers licensed content on demand and on the go. Netflix is a dominant figurehead
within the internet television network industry and the financial statements show that there is
potential for Netflix to continue its dominance. While the issues of piracy, licensing agreements,
and technology are always present, Netflix has invested enough into their business to prevent any
potential major breakdown. Netflix is a stable company with a bright future on the horizon.

Table of Figures
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Chart of Subscription Projection..... 5

Consolidated Statements of Operations...6

Domestic Streaming Financials...7

References

Netflix, Inc. - Annual Report. N.p., 27 Jan. 2017. Web. 08 May 2017.

"Netflix's View: Internet TV Is Replacing Linear TV." Netflix : Netflix's View: Internet TV Is Replacing Linear
TV. N.p., n.d. Web. 08 May 2017.

"Netflix, Inc. (NFLX) Earnings Forecast." NASDAQ.com. N.p., n.d. Web. 08 May 2017.

"Basic Info." Netflix Inc. N.p., n.d. Web. 08 May 2017.

Posted by Nic Newman Research Associate, Reuters Institute on January 10, 2016, and On. "Media,
Journalism and Technology Predictions 2016." Digital News Report. N.p., n.d. Web. 08 May 2017.

"NFLX : Summary for Netflix, Inc. - Yahoo Finance." Yahoo! Yahoo!, n.d. Web. 08 May 2017.