The availability of new opportunities through which the various consumers could watch movies had greatly created a ripe environment for the development of competition in the movie rental industry. Market research indicated that the industry was very lucrative as it totaled a combined consumer expenditure of $9.5 billion in 2004.
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The industry was made up of four segments. The first was the rentals via mail which raked in total revenue of $2 billion. There were also In-store rentals which brought in revenues totaling to $5.8 billion. Video on Demand (VOD) accounted for $1.3 billion while vending machines brought in $400 million.
The industry was projected to hold a higher potential for the increase by 68 per cent in the rental of DVDs between 2007 and 2011. Case 4 is about the competition that has been going on between Netflix and Blockbuster, two players in the movie rental industry.
Blockbuster launched Total Access, a concept that allowed subscribers to return the movies that they had rented by mail for a free rental.
This strategy that was employed by the firm worked greatly as the online sales of Blockbuster nearly doubled. By the end of 2006, Blockbuster had a total of 2.2 million subscribers. This was a huge chunk of the movie rental market given that the firm was started many years after Netflix had been introduced into the market.
Business Problem And Critical Issues
Porter’s five forces analysis
There is a high rate of competition in the movie rental industry in the US. This is supported by first, the high power of the buyers. According to Porter (2008), when there is a variety of substitutes from which users can choose from, they gain significant power and thus they can switch from one subscriber to the other depending on the products that they are being offered.
The users could access the movie rentals via live streaming, using their TV remote to place orders from their cable providers or even use Video on Demand services. Also, there was a high threat of substitutes as the users could either go to the theatres, buy DVDs or rent s all this were way through which they could be able to satisfy their viewing pleasure.
The threat of new entrants was more real in the industry as the cost of entry was not prohibitive. The suppliers also enjoyed a considerable power in the industry especially the movie production houses that were to rent out the various rights for the movies that they produced for rental services. This has been the force that shapes up the competition in the movie industry.
Industry driving forces
There exists a variety of driving forces that were being faced in the industry. First, there was an increase in the online rental of DVDs, movie file and music download and consumers were also highly interested in VOD.
This greatly increased the competition between the players in the industry as the firms that operated in the industry focused on how they could be able to provide the services that were required by the various buyers in the industry.
The online rental accounted for a big chunk thus a firm that provided the online rental services were more likely to acquire more market share in the industry where the firms operated (Porter, 2008). The industry was also being impacted on by the low prices of high definition TVs.
This has provided increased more quality viewing for the various consumers thus an increase in the viewing. The competition ill increase in the industry due to the rise in the number of players who will be involved in the provision of online movie rentals.
Industry profile and attractiveness
The industry is controlled by innovation. The innovativeness of a firm is a major contributor to the firm’s ability to be able to withstand the environment of the operations. Netflix is very innovative as it could anticipate changes in the tastes of the customers.
Those customers who were able to stream the movies direct to their PCs were given an opportunity by the discoveries that Netflix made. The firm was able to anticipate these changes and make discoveries for the technology that was needed. The workforce of Netflix is very innovative thus they are able to ensure that the market demands are met by the firm in terms of the design, production and marketing activities.
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When such a scenario comes up, the firm will lose out in terms of both the quantity and quality of the product offering (Thomke, 2003). The movie recommendation software that was being used by Netflix also significantly increased their sales as the subscribers were given a list of movies together with their previews. This recommendation was based on the previous orders that the customers of the firm had made.
The strategy of Netflix is also long term, for instance, they properly anticipated the changes that would take place 3in the industry.
They engage in strategic partnerships for instance the partnership with LG that allowed for the instant watching of the videos direct to the television screens of the subscribers of the firm (Porter, 2008). Also, the firm was focused and anticipated that the profitability in the industry was pegged on the ability to stream content over the Internet and not the traditional method of postal delivery.
Even though Blockbuster had been the leader in the movie rental industry, it was faced with a myriad of problems which greatly affected the operations of the firm. The high costs that were incurred by the firm significantly ate into the profit that would have been enjoyed by the firm.
The firm also trailed behind Netflix in the various discoveries and innovations. The first instance is that of no limit on charges on the DVDs that overstayed and the use of online moving rentals. The firm still maintained the brick and mortar stores that were significantly incurring more costs than Netflix (Porter, 2008).
Considering the analysis, it can be rightfully said that Netflix was best positioned at it was well poised to benefits from the various changes that were expected in the movie rental industry. The innovations that the firm made and the alliances have put it in a strategic position to be able to capitalize on the changes in the climate when the changes do occur.
Parameters For Analysis
Key success factors in the movie rental industry
In the next 3-5 years, there is a variety of factors that will shape the competition in the movie rental industry. The first will be the ease of access. There is a growing consumer trend towards accessing the movie rentals through the provision of Internet.
This increased level of access has increased the number of consumers who may be able to access the movies (Gamble & Thompson, 2011). In most instances, the customers who were not able to access the brick and mortar stores have a higher opportunity to be able to access the movies. The growth has been split between the two major players in the movie rental industry (Porter, 2008).
The streaming of movies direct to the PC is also a trend that will take the industry by storm in the coming years. Since the speed of Internet access has been growing at an alarming rate, the players in the industry will need to provide a live movie streaming after subscription.
The opportunity will be for the downloading of the movies on VOD or straight into their TV sets. There are also the issues regarding the quality of the offering, for instance, late return penalties, the quality of the movies especially the use of High Definition TV, etc.
Strategy of Netflix
The generic competitive strategy that is employed by the firm is broad differentiation. The industry was characterized by movie rentals that were delivered by mail, but the firm has seen an opportunity through which it can increase its focus.
Apart from offering movies that could be streamed live to the PC of the subscribers, the firm also explored other opportunities for instance the broadening of the product offering to the other platform. The differentiation was good for the firm as the customers began to appreciate the quality that was being offered.
The quality of the viewing was an advantage that had been established at the firm (Gamble & Thompson, 2011). The type of competitive advantage that Netflix is trying to achieve is differentiation which was in terms of the products that the firm offered and also the quality of the offering of the products of the firm.
There exists a variety of strengths that are enjoyed by the firm. The first is the high brand recognition. The firm entered the industry at a time when there were very few competitors in the market.
Therefore, the firm has continued to strengthen its brand through the offering of unique services, for instance, DVD rental by mail was an original idea of the firm, later, the firm also engaged in offering of a larger variety of products as compared to the competitors.
Secondly, the firm understands the competitor’s weaknesses and uses this knowledge to provide services that satisfy the customers. The first issue here is the late fees, when the firm realized that the customers were irritated when they were charged late fees, it scrapped these fees from its operations, therefore creating a good feeling in it customers (Porter, 2008).
Netflix recommended that customers be able to buy their movies from Wal Mart while Wal Mart encouraged the people looking for movie rentals to be able to visit Netflix website. Also, the website of the firm is an award winning (Chung & McLarney, 1999).
It has the capability to accurately predict and recommend the movies that the visitors will more likely want to rent. This was based on the algorithms that used the information regarding the last (previous) rentals of the customers.
The weaknesses included the inability to provide enough copies of newly released movies. This led to some dissatisfaction by customers as most people always prefer watching the movies around the same time that they premiere in the movie theatres.
In its endeavors to keep the cost of the operations down, the firm focuses on limited renting thus leading to loss of potential customers (Chung & McLarney, 1999).
The waiting period between the time the customers rent the movies and the time they are receiving them are also long. Finally, the firm has no direct connection with movie production studios and thus must purchase through the consumer channel making the movies expensive.
The opportunity that is available to the firm is the development of live streaming and the ability of the firm to absorb the current providers just as it was able to absorb the Wal Mart’s DVD section.
Finally, the threats that are faced by Netflix include the high rate of competition in the movie rental industry. The firm is also less suited to compete with hardware innovations such as Apple TV (Chung & McLarney, 1999). There is also the potential threat of entry by other firms for instance in VOD.
The strengths that blockbuster enjoy includes brand familiarity. Secondly, the firm has global operations; the firm also has partnerships with movie studios thus significantly lowering the costs of the firm. The firm also offered more avenues through which the movie rentals can be undertaken; by mail or in the stores.
Customer satisfaction is achieved through offering a free movie rental for those who returned DVDs by mail, and finally the varieties of the movies chosen. The weaknesses included the damaged brand due to the previous charging of fees, low levels of success in the home delivery of movies and the low investor confidence (Leonard, 1995).
The opportunities that the firm had included the creation of store experiences, the development of online network of distribution, lower price offering due to the partnership with the movie production companies.
Finally, the threats that the firm faced include the VOD, increased competition especially from Netflix and the deregulation of broadband which would allow for the streaming of movies over the Internet.
Sustainable Competitive strength
The competitive strength of Netflix compares with that of blockbuster in that while blockbuster has physical stores from which it operates Netflix makes use of mail-orders.
Due to the nature of business that Blockbuster has adapted, it enhances its competitiveness through rentals since by renting in many places will ensure that it lowers the high fixed costs (Porter, 2008). Some of the marketing strategies that blockbuster has put in place are game and movie pass which allows clients to have a limitless game or rent movies for a month at a fixed rate.
For Netflix, the cost structure is totally different in that it has ensured that its fixed costs are far much lower than those of Blockbuster. In other words, while blockbuster makes use of physical stores, Netflix makes use of distribution centers, websites and inventory as its fixed costs and are much cheaper than those of Blockbuster.
Due to this, the average rental from Netflix is much lower than that of blockbuster and can attract a higher number of customers. Netflix ahs a better competitive advantage than Blockbuster in that it has a lower cost and also it can increase its markets share greatly by “stealing” customers from Blockbuster while it would be relatively hard for Blockbuster to do the same (Porter, 2008).
In other words, Blockbuster desperately needs to have market share something which Netflix does nott and Netflix can use that to its advantage whenever it needs.
Pros And Cons
Financial analysis of the firm
The earnings per share greatly increased especially following the slump that was registered by the firm in 2000. From 2002 onwards to 2007, the increase shows that the firm has been on the path of success as there was an increase from $ 0.74 in 2002 to stand at $1.00 in 2007.
The operating margin of Netflix was increasing especially to 7.6 percent in 2007 from 5.5 per cent in 2006. The current ratio for Netflix stood at 2.07. ROA has been increasing, i.e. from 0.8 per cent in 2006 to 9.8 per cent in 2007 (Kipling, n.d.).
The current ratio for 2007 is 1.02, thus, this shows that the firm has a high potential to pay its liabilities as the assets can be quickly converted into cash. The earnings per share of the firm have been on a downward spiraling posting very low figures in 2007.
Form $ 6.89 in 2004 to $ 0.45 in 2007. The operating margin of the firm decreased from 4.9 per cent in 2006 to 0.7 per cent in 2007. ROA has been reducing, i.e. from 1.6 per cent in 2006 to negative figures (Kipling, n.d.).
Considering the financial ratios, Netflix is in a stronger position as compared to Blockbuster. Netflix has stronger cash flow liquidity than its competitors.
Priority management issues
At Netflix, there are two main issues that must be addressed. There are concerns about the DVD based movie rentals. This is informed by the fact that there is a high increase in the development of new technologies. Secondly, focus on the provision of new movies (Gamble & Thompson, 2011).
The main recommendations that can be given in regard to that two issues include a focus on the provision of movies in other formats. This will be afforded by eh firm especially considering the fact that the firm has a huge reserve of assets that can finance the various operations.
The firm should also enter a partnership with the movie producers so that it can further reduce its costs of operation. This will further contribute towards strengthening the firm.
The issues that should be dealt with by the firm include high costs especially those that are associated with the expenses and the dwindling brand equity and recognition (Gamble & Thompson, 2011).
The recommendations that will be used in this case include a higher focus on using online avenues rather than the use of brick and mortar stores that require so many employees and high costs of inventory to keep. Secondly, the firm should increase the movie offering so that it can offer the quality that the consumers had known the firm for.
From the case analysis, it has been established that Netflix will significantly have a higher rate of returns for its investors and will continue to dominate the industry. This is possible to undertake through the differentiation focused competitive advantage, the strategic alliances and innovation at the firm.
Chung, E., & McLarney, N. (1999), “When Giants Collide: Strategic Analysis and Application”, Management Decision 37(3): 233 – 247.
Gamble, J., & Thompson, A. (2011), Essentials of strategic management: The quest for competitive advantage, New York, NY: McGraw-Hill/Irwin.
Kipling, R. (n.d.), A guide to Case Analysis. Web.
Leonard, D. (1995), Wellsprings of Knowledge: Building and sustaining the sources of innovation, Boston, MA: Harvard Business School Press.
Porter, M. (2008), “The five competitive forces that shape strategy”, Business Harvard review, January: 1 -18.
Thomke, S. (2003), Experimentation matters: Unlocking the potential of new technologies for innovation, Boston, MA: Harvard Business School Press.