Strategic Audit of Netflix

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Strategic Audit of Netflix

  1. 1. Strategic Audit of By Josh Morrow
  2. 2. Executive SummaryNetflix is a dominant force in the online DVD and movie rental industry. Over the years, the industry hasexperienced rapid growth due to Internet advances, new technologies, and new distribution models. Now,competitors are beginning to surface with the intention of knocking Netflix out of the limelight.In order for Netflix to remain a competitive force, it is essential for Netflix to research and understand theindustry in its entirety, and respond quickly to these new competitors. Among these, Netflix’s biggestcompetitors happen to be well-financed corporations with proven success in other markets. Thesecompetitors include Apple, Google, and Amazon, Cable TV networks, streaming services, and muchmore.However, Netflix does have a huge first-mover advantage over its competitors—Netflix was literally thepioneer that created the market. While their current online DVD rental service and instant streamingservice continues to boom, they must decide how they will continue to differentiate themselves fromcompetitors, all whom come with added features and new twists.The new market will require Netflix to think and act strategically, and because of this, I’ve formulatedstrategies to be implemented and measured as a way of contending with these new opponents. Page | 2
  3. 3. Table of ContentsIntroduction ......................................................................................................................................5 History ..........................................................................................................................................5 Current Organizational Challenge ................................................................................................9Strategy Formulation .....................................................................................................................10 Mission Statement ......................................................................................................................10 Vision Statement ........................................................................................................................10 External Analysis .......................................................................................................................12 The Competition .....................................................................................................................12 Economic Impact ....................................................................................................................14 Social, Cultural, and Demographic Factors ............................................................................14 Political, Legal, and Governmental Factors ...........................................................................15 Technological Changes...........................................................................................................15 Trends .....................................................................................................................................15 Internal Analysis ........................................................................................................................16 Board of Directors..............................................................................................................16 Senior Corporate Management ..........................................................................................17 Corporate Resources and Functional Areas .......................................................................17 Corporate Culture and Structure .............................................................................................17 Distinctive Competencies .......................................................................................................20 Competitive Advantages.........................................................................................................21 Operations...............................................................................................................................23 Human Resources ...................................................................................................................24 Finance and Accounting .........................................................................................................24 Information Technology .........................................................................................................24 Research and Development ....................................................................................................25 Financial Analysis ......................................................................................................................26 Current Financial Analysis .....................................................................................................26 Comparing Performance to Past Periods ................................................................................26 Analyze the Entire Industry and Its Future .............................................................................28 Long-Term Objectives ...............................................................................................................29 Analysis of Strategic Alternatives ..............................................................................................30 Page | 3
  4. 4. EFE Matrix .............................................................................................................................30 Competitive Profile Matrix.....................................................................................................30 IFE Matrix ..............................................................................................................................30 SWOT Matrix .........................................................................................................................31 Grand Strategy Matrix ............................................................................................................31 BCG Matrix ............................................................................................................................31 Strategy Recommendation ......................................................................................................32Strategy Implementation ................................................................................................................33 Establish Annual Objectives ......................................................................................................33 Determine Policies .....................................................................................................................33 Establish Supporting Programs ..................................................................................................34 Determine Contingency Plans ....................................................................................................34Strategy Evaluation and Control ....................................................................................................35 Standards or Targets Used as Guidelines ...................................................................................35Conclusion .....................................................................................................................................36 Page | 4
  5. 5. IntroductionNetflix, Inc. is a leading Internet subscription service for movie and TV show rentals, and haspositioned itself as a worthy competitor in the industry with more than 20 million subscribers inthe U.S. and Canada. Netflix offers an enormous library of box office hits, award-winning TVshows, and timeless classics to its subscribers. For just $7.99 a month, subscribers can instantlystream unlimited content over the Internet to Netflix-compatible devices, and if it isn’t availableto stream, Netflix offers a DVD-version of the content that can be shipped overnight. Netflix hascompletely revolutionized the way movies can be rented, thus eliminating the need for trips tothe typical brick-and-mortar movie rental service.HistoryThe inspiration for Netflix was sparked when Reed Hastings, a software executive, was chargeda $40 late fee after returning an overdue videotape of Apollo 13 (1). In August of 1997, with thehelp of Marc Randolph, Hastings founded Netflix in Scotts Valley, California, and the two pavedthe way for the future of online movie rentals. Hastings was named chairman and Randolph tookthe role of CEO for Netflix (1). Page | 5
  6. 6. Around the time that Netflix was born, DVDs were in their infancy, and Netflix sought toleverage this technology (2). Since most brick-and-mortar retailers did not carry this media,Netflix was given a clear advantage over competitors by becoming an early adopter of DVDtechnology. DVDs were smaller and lighter than traditional VHS tapes, so shipping costs wereminimized.In April of 1998, Netflix began its operations by offering seven-day movie rentals in DVDformat, which was still relatively new (2). Fortunately, DVDs were quickly gaining ground asconsumers became more familiar of the quality and convenience of such a format.By September of 1998, Netflix had amassed a library of more than 2,000 titles. Later this month,Hastings would be named the new CEO for Netflix, and Netflix would get a substantial boost insales by offering 10,000 copies of President Bill Clinton’s Grand Jury Testimony in the Clinton-Lewinsky affair at two cents a copy plus an additional $2 for shipping and handling. On thecontrary, Netflix received some negative press from the media when small portions of theseDVDs were found to contain pornographic material (2). The manufacturer for these DVDsclaimed it was merely a mix-up. Later this year, Netflix would make the announcement that theywould offer rentals exclusively and would no longer sell DVDs (2). Page | 6
  7. 7. In November of 1998, Netflix added Patty McCord to the team as chief talent officer, and twomonths later, Neil Hunt was appointed chief product officer (1). McCord and Hunt wouldbecome integral to the development of Netflix.In March of 1999, Netflix moved operations to Los Gatos, California, which remains theheadquarters for Netflix today. Months later, Netflix added Barry McCarthy to the talent rosteras chief financial officer (1).As December of 1999 approached, Netflix commenced the subscription model that Hastings hadplanned for originally. Netflix still uses this model today, offering up unlimited DVD rentals fora low monthly subscription fee (1).By January of 2000, Netflix developed and launched the personalized movie recommendationsystem that would forever change the movie rental industry. This system would compile theratings of movies reviewed by other Netflix members, acting as a sort-of “matchmaking service”for predicting viewer movie tastes (1). Then, in the Spring of 2000, Netflix recruited LeslieKilgore as chief marketing officer and Ted Sarandos as chief content officer. Page | 7
  8. 8. The year 2001 would be noteworthy for Netflix, as they became the first online movie rentalservice to enter into exclusive revenue sharing contracts with Dreamworks SKG, TwentiethCentury Fox, and Universal Studios (1). Additionally, Netflix announced a partnership with BestBuy, offering up exposure to the major electronics chain’s 1,800 stores nationwide (2). Thefollowing year, in May of 2002, Netflix presented its initial public offering (IPO) of 5,500,000shares at a price of $15.00 per share, traded on the NASDAQ under the ticker symbol ‘NFLX’(1). At this time, Netflix had more than 600,000 subscribers (1).In December of 2005, Netflix’s subscriber base had grown to an impressive 4.2 millionsubscribers, and two years later, Netflix had exploded to 6.3 million recurring customers, upmore than 51 percent since 2005 (1).January of 2007 would represent one of the most critical times for Netflix. Netflix announcedthat it would add a new feature that enabled movies and television shows to be streamed instantlyto subscribers’ computers (1). This feature contributed to Netflix’s budding competitiveadvantage.When July of 2009 came about, Netflix had made dealings with several key businesses, addingmore growth and profits to their bottom-line. Netflix was now a standard feature on VIZIO’snew line of Internet televisions. Netflix also became available on Samsung and TiVo’s, as wellas a standard feature on the Microsoft Xbox 360 and Sony’s Playstation 3 (1). Page | 8
  9. 9. Netflix ended the year of 2010 with more than 20 million subscribers and is now available on atleast 200 different devices, including Apple’s iPod Touch, iPhone, and iPad (1). Netflix is thefirst and only company to offer it’s entire library of streaming movies to wireless mobile devices.Current Organizational ChallengeAs the U.S. continues to suffer from a rough and weakened economy, it is essential that Netflixremains poised and ready to ride the storm. Interestingly enough, Netflix has managed to flourishthus far, and things are looking really good for Netflix. The first quarter earnings for 2011 werealmost doubled to about $60.2 million with another surge of 3.6 million subscribers, for aremarkable 23.6 million total subscribers (3).Netflix must continue to work at building partnerships to increase the availability andaccessibility of its instant streaming features. Another imminent organizational challenge forNetflix lies in its product portfolio—Netflix must diversify its features in order to adapt to theshifting innovation and impending competitors. At the present, Netflix is the dominant force inthe marketplace, but this may change if Netflix is careless with research and development. Page | 9
  10. 10. Strategy FormulationMission Statement“Our appeal and success is built on providing the most expansive selection of DVDs; an easyway to choose movies; and fast, free delivery.” (4).The mission statement Netflix has settled upon is well defined and describes their organizationalfunctions, as it should. Furthermore, the mission statement outlines the offerings and servicesthat make Netflix inherently distinct. However, the mission statement seems to lack Netflix’sbiggest product: the unlimited, instant-streaming subscription service. This seems to point to thepossibility of an outdated mission statement.Vision Statement“Our vision is to change the way people access and view the movies they love.” – CEO ReedHastings. (4).Netflix’s vision statement is fairly respectable and matches up with the organization, but it couldalso use more work. The vision statement could be more purpose-driven with more emphasis onhighlighting Netflix’s unique competencies. In order to create a more valuable vision statement, Page | 10
  11. 11. Netflix should emphasize senior management’s view on long-term direction, and it should guidethe decision-making process. The vision statement should also communicate the Netflix’s keypurpose so that employees will buy in and fully commit. Moreover, it should set the bar forlower-level management, creating consistency throughout the organization. Finally, the visionstatement should prepare Netflix for what awaits them in the future. With all of these elementsworking synergistically, such a vision statement would add real value to Netflix. Page | 11
  12. 12. External AnalysisOver the years, Netflix has positioned itself as the leading online movie rental service. At thepresent, Netflix has an enormous collection of hit movies, television shows, documentaries, andindependent films that can be streamed instantly or viewed on DVD for a miniscule monthly fee.These services, paired with Netflix’s superb senior management and first-rate customer service,has demonstrated that the organization is quite a contender.The CompetitionIn the past, Netflix was a dominant force in the online movie rental industry and faced very fewcompetitors. In fact, Blockbuster was Netflix’s biggest opponent for most of the organization’slife. In recent years, however, new competitors have begun to surface, and this myriad of newentrants could prove to be tough. Among these are innovative firms like Apple, Amazon,Google, Hulu, Redbox, and traditional cable companies, and all possess strong financials (5).Apple (AAPL) looks to pose the biggest threat to Netflix. Apple is an innovator and their productofferings are a testament of creative thinking and strong product branding, under direction ofvisionary Steve Jobs. While Apple offers a diverse product line of consumer electronics, thefocus is Apple TV and the movie rental options on iTunes. Strangely enough, the Netflix app isavailable for Apple TV, but at the same time, Apple trumpets its iTunes movie rentals proudly. Page | 12
  13. 13. This is both an opportunity and a threat for Netflix. Financially, Apple is doing well and hasmanaged to bring in over $19.6 billion in net income, trailing twelve months (6).The second largest competitor for Netflix is Google (GOOG). The king of search engines hasshowed over time that it can do business in a multitude of industries. Google’s newest offering,Google TV, may prove formidable. Google TV does not offer movie rentals like Netflix, but thiscould change, as Google is known for extending the usage and feature-sets of its products andservices. As is the case with Apple, Google’s financials are relatively robust. Google’s netincome (trailing twelve months) totaled $8.8 billion (7).Amazon (AMZN) is Netflix’s third largest competitor. Amazon’s specialty lies in its massiveonline business, where it generates most of its revenues. Enter Amazon Prime. Amazon Prime isthe newest service from Amazon that offers unlimited free two-day shipping, one-day shippingfor $3.99, and unlimited instant streaming of more than 5,000 movies and TV shows, all for just$79 per year (8). Amazon Prime is still in its infancy, although it may become a source of toughcompetition for Netflix in the years to come. Amazon’s net income for the last twelve monthshas totaled $1.2 billion (9). Page | 13
  14. 14. Economic ImpactAs was previously mentioned in the ‘Current Organizational Challenge’ section of the strategicaudit, Netflix has flourished throughout the entire economic downturn. There are several factorsat play that may have contributed to such success. First and foremost, less spending byconsumers may have lead many to cut back on expenses—namely, cable TV subscriptions.Comcast, the largest cable provider in the U.S., reported in October of 2010 that more than275,000 subscribers canceled their service, representing a 3.5 percent reduction in cable TVsubscriptions (10). Subsequently, the cost of a Netflix subscription is diminutive when comparedto movie rentals from brick-and-mortar stores like Blockbuster, and the unique feature-setoffered by Netflix adds to its attractiveness and viability. More recently, Netflix announced that2011 first-quarter profits have risen nearly 88 percent (11). Given Netflix’s track record, theorganization’s successes will likely persist throughout the bumpy economic conditions.Social, Cultural, and Demographic FactorsNetflix’s market is limited to those who own computers with access to a broadband connection(for streaming) or a DVD player (for DVD rentals). The prices for computers, Internet access,and DVD players have lowered over the years, enabling less affluent consumers to purchasethese products and services. Netflix presently offers its subscription service to the U.S. andCanada exclusively. Plans for expansion into the foreign markets are a work-in-progress. Page | 14
  15. 15. Political, Legal, and Governmental ForcesOutside of current regulations that must be followed by companies in North America, Netflix’splan for foreign expansion would bring about a multitude of new legal issues. Just a few of themany potential issues would include: international shipping, NAFTA, employment and laborlaws, safety laws, tax laws, and content guidelines.Technological ChangesThe entertainment and movie industry is experiencing rapid growth and innovation with theadvent of three-dimensional televisions, high-definition DVDs, and the rising popularity ofstreaming content. The market for traditional DVD media has declined over the years, asbroadband speeds becoming faster and cheaper, and streaming video stands to replace it. It ishighly probable that Netflix will move away from DVD rentals and move towards streamingvideo exclusively.TrendsThere are numerous up-and-coming trends in the Internet movie and TV rental subscriptionservice industry. “Unlimited” services, matchmaking and taste prediction systems, review andstar-rating features, social media integration, targeted video advertising, three-dimensional video,high-definition video, and live video streams are just a few of the many trends that are beingfollowed in 2011. Page | 15
  16. 16. Internal AnalysisNetflix has a reputation for excellence, offering only the highest quality subscription services,along with customer service that is second to none. In fact, Netflix has done so well that it hadbeen placed among Fortune Magazine’s “50 Most Admired Companies” in March of 2011 (12).This would not have been possible without senior management’s forward-looking strategies,tenacity, and the company culture they fostered for their passionate employees.Board of DirectorsNetflix’s Board is comprised of a diverse group of individuals and includes pioneers in the techindustry, investors, venture capitalists, Netflix executives, and former executives of majormotion picture corporations (13). Listed below are all current board members for Netflix. • Richard N. Barton – CEO & Chairman of Zillow, Inc. • A. George “Skip” Battle – Investor • Charles Giancarlo – Managing Director of Silver Lake • Tim Haley – Managing Director of Redpoint Ventures • Reed Hastings – Co-founder & CEO of Netflix, Inc. • Jay Hoag – General Partner of Technology Crossover Ventures • Ann Mather – Former EVP & CFO of Pixar; Former SVP of Disney Page | 16
  17. 17. Senior Corporate ManagementAs with Netflix’s Board of Directors, the Senior Corporate Management is without a doubt aresilient group of individuals. Over the entire life of the company, the senior officers have beenthe driving force behind all of the innovation, profitability, growth, and sustainability. Thecurrent senior management team is listed below (13). • Reed Hastings – Co-founder & Chief Executive Officer • Neil Hunt – Chief Product Officer • David Hyman – General Counsel • Leslie Kilgore – Chief Marketing Officer • David Wells – Chief Financial Officer • Patty McCord – Chief Talent Officer • Andrew Rendich – Chief Service & DVD Operations Officer • Ted Sarandos – Chief Content OfficerCorporate Culture and StructureNot unlike most major corporations, Netflix has developed a corporate culture and employs anarray of distinctive senior management positions. What really sets them apart is how they craftedtheir corporate culture, which they call “Freedom & Responsibility Culture” (14). Page | 17
  18. 18. There are seven unique aspects of the culture at Netflix (15): 1. Values are what we value. Netflix desires employees to embody nine different values: judgment, communication, impact, curiosity, innovation, courage, passion, honesty, and selflessness. These values represent the way of thinking and doing that Netflix expects employees to exemplify, and are the guidelines for every decision made. 2. High Performance. Unlike major competitors Google and Apple, Netflix does not offer unnecessary luxuries in the workplace that may hinder performance. Instead, Netflix rewards good performance with generous severance packages. Performance is measured by how much work is done, how quickly it is done, and how well it was done. Also, managers use a “Keeper Test” for determining whether to keep someone or let them go. The test assists the manager in determining which employees the manager would fight to keep if they were leaving for a similar job with a competitor. 3. Freedom & Responsibility. The ultimate goal for Netflix is to increase the freedom for its employees as it grows, rather than limiting it, in order to draw in innovative and responsible employees for the long-term. This represents an interesting strategy, as most companies tend to restrict freedoms as they grow. Netflix also doesn’t track vacation days, as long as employees complete their work efficiently. Dress code policies are absent. Travel expense tracking is considered unnecessary if employees agree to “act in Netflix’s best interests.” 4. Context, not Control. Netflix trains their managers to discover how to assist employees in achieving more by setting an appropriate context as an alternative to controlling the employees. Formulating strategies, using metrics, forming assumptions, setting Page | 18
  19. 19. objectives, creating clear roles, and keeping transparency around the decision-making process all contribute to setting the context for which sound decisions are made. 5. Highly Aligned, Loosely Coupled. Netflix has elected to use this model of teamwork because effectiveness becomes dependent upon people that perform well and a well-set context. This enables Netflix to continue to grow large, while remaining swift and flexible. 6. Pay Top of Market. Netflix believes that it is better to have one exceptional employee that gets more done and costs less than two employees who are “adequate” at best. Moreover, compensation is not dependent upon Netflix’s success. Whether Netflix is thriving or tanking, it will pay at the top of the market. 7. Promotions & Development. At Netflix, there will be certain opportunities for career growth and development for certain groups. At the same time, there may be limited growth. Netflix recognizes that career growth is dependent upon not only talent, but also luck. In order to be a candidate for a promotion, the job has to be large enough, and the person being promoted has to be a “superstar” in their current job role.Together, these seven qualities of Netflix’s corporate culture work to create the synergy thatpowers Netflix. Due to the exceptionality of the culture in the organization, Netflix manages toattract top talent every year. Also, Netflix was awarded the Employees’ Choice Award atGlassdoor.com as one of the fifty best places to work in 2009, which would suggest thatemployee satisfaction is relatively high (15). Page | 19
  20. 20. Distinctive CompetenciesNetflix has several fundamental competencies that have been leveraged over the years to producesignificant competitive advantages in the industry. Of these, the most prominent corecompetencies are convenience, reliability, personalization, and ease of use.Netflix maintains a level of convenience by way of its unique distribution model. The absence ofbrick-and-mortar locations allows Netflix to focus solely on Internet distribution (passive) andshipping (active) via the United States Postal Service. Delivery to the consumer is quick andreliable, as subscribers are given the choice to watch streaming movies and TV shows 24/7 ontheir computers or television, and DVDs are delivered overnight (16).Given Netflix’s past and current successes, Netflix has proven it can remain a reliable, consistentservice. The framework and technology that is in place enables Netflix to minimize error, serviceinterruptions, and delays. When such events do occur, Netflix generously compensates customerswith free months, reduced billing fees, and other promotions in order to retain customers andmaintain a high level of customer satisfaction. Netflix also prides itself in replacing andresending DVDs in the event that they are lost during the shipping process.Netflix’s website and applications offer a high degree of personalization to consumers. Netflixdevelopers have produced a system that matches movie ratings by other customers with your Page | 20
  21. 21. own tastes, and displays movie recommendations to your TV screen (17). Users can then placethese movies and TV shows into their queue to watch instantly or ship to their residence.Netflix is indeed user friendly, with very few menus or buttons to clutter the screen. Thegraphical user interface has been designed with aesthetics in mind, and navigating from onescreen or menu to the next is a breeze, even for the less technically savvy crowd. Subscribers cansearch for particular movies and shows, view information and ratings on these shows, add themto their queue, and play them instantly to their television, computer display, or mobile device.Competitive AdvantagesNetflix has managed to build fairly sizeable, sustainable competitive advantages that havecontributed to its success and a lack of worthy competitors, and there are several reasons for this.First, Netflix has the “first-mover advantage.” Netflix was the first into the market (which theycreated) and they had a large subscriber base before potential competitors noticed. Blockbusterand Wal-Mart were two corporations that tried to contend, but fell flat and could not sway themarket. This has raised the barrier to entry, making it quite difficult for a business to jump in andtake hold of the marketplace. Page | 21
  22. 22. Differentiation is another pure advantage for Netflix. Netflix delivered movies to subscribers’homes and offered a different price tier than Blockbuster, Hollywood Video, Movie Gallery, andother big-name brick-and-mortar movie rental businesses. Netflix also had no late fees andcontinues that policy to this day. Netflix’s method for online DVD rentals has also beenpatented, eliminating any clones from surfacing.Netflix has branded itself well with regards to instant streaming video, to the point that it isalmost iconic and synonymous with the name. Netflix’s superb technology makes it a clearwinner in the streaming movie rental category.Lastly, customer service is one of Netflix’s strongest areas. Netflix has maintained a superiorrecord of customer service since it began operations. Netflix has such confidence in its customerservice that it has completely eliminated e-mail support, forcing a customer to contact the callcenter. The company gives call center reps the liberty of offering account credits and free gifts tounsatisfied customers. In 2005, Fast Company Magazine acknowledged Netflix as the recipientof their Customer First award, and in December of 2010, the American Customer SatisfactionIndex (ACSI) declared Netflix the #1 e-commerce company for customer satisfaction (18). Page | 22
  23. 23. OperationsNetflix’s operations are relatively run-of-the-mill. Netflix uses warehouses to distribute itsinventory of DVDs. The warehouses are discrete and the trucks are unmarked and completelydevoid of anything related to Netflix, in order to avoid the possibility of customers approachingthe warehouses or trucks for movie returns and pick-ups.Netflix uses “virtual inventory pooling” to manage inventory, as if its all in one pile, even thoughsome of this inventory may be in another location. Items are constantly being sorted and placedinto groups. Depending on where a DVD must go, it will be placed in the “ship today” group orthe “scan tomorrow” group.MarketingMarketing was integral for Netflix and was big reason that it achieved success early on. Netflixmade use of major search engines like Google, Yahoo, MSN, AOL, and Altavista. The use ofsearch engine and social media marketing has given Netflix extra exposure. Netflix currentlyoffers free trials on their website and free trial passes for current subscribers to hand out tofriends and family members (19). Strategic partnerships with other businesses like Microsoft,Sony, major motion picture studios, and television networks have assisted in building the Netflixbrand. Page | 23
  24. 24. Human ResourcesAs was mentioned previously in this strategic audit (p. 17), the “Freedom & ResponsibilityCulture” that Netflix has created is used actively across all departments, including HumanResources.Finance and AccountingNetflix follows the Generally Accepted Accounting Principles (GAAP) and has been given anAccounting & Governance Risk (AGR) rating of Aggressive (20). Issues that influenced therating the most included: 1) Consecutive quarters of Earnings Per Share growth, 2) Sharerepurchases, 3) Prepaid and Operating Expense recognition, and 4) Intangible Asset valuation(20).Information Technology (IT) and SystemsNetflix is completely dependent upon the performance and reliability of their informationtechnology infrastructure, because most of their operations require technology. Netflix mustensure that IT, strategies, and operations are completely aligned. Netflix uses proprietarysoftware in order to meet inventory demands, track purchase orders, and maintainreliability/responsiveness. Page | 24
  25. 25. Research and DevelopmentNetflix has a fairly large R&D budget, and it surely makes use of it. In 2009, Netflix held acompetition that would award $1 million to the team that could best improve the Netflix movierecommendation algorithm. After the winner was announced, Netflix revealed that all previousparticipants could expect a second round of the competition, where teams must create analgorithm that caters to a user’s demographics in order to recommend movies and TV shows(21). Page | 25
  26. 26. Financial AnalysisCurrent Financial AnalysisBusiness is booming for Netflix, despite the recent economic downfall. In 2010, Netflixaccounted for $2,162.63 million in revenues with a net income of $160.85 million (22). This islargely due to the acquisition of new content, the formation of new strategic partnerships, and theshift to Internet streaming media. Earnings have rapidly and consistently each year.Comparing Performance to Past PeriodsLooking back at the past performance of Netflix, increasing revenues and net profits are veryevident. In 2008, Netflix brought in $1,364.66 million in revenues and a net income of $83.03million (22). By 2009, total revenues had grown to $1,670.27 million with a net income of$115.86 million (22). As was noted in the Current Financial Analysis, 2010 was another goodyear for Netflix, with revenues at $2,162.63 million and an income of $160.85 million. Thisrepresents three straight years of profitability and growth.From 2008 through 2010, Netflix maintained a Current Ratio average of 1.71, ranging from 1.58to 1.81 (23). In other words, Netflix has a little less than double its liabilities in assets. Sinceacceptable Current Ratios differ from one industry to the next, it can be difficult to pinpoint themost ideal Current Ratio Netflix should strive for. [See Appendix A] Page | 26
  27. 27. Additionally, Netflix has increased its Return on Assets (ROA) steadily over the last three years.In 2008, the ROA was 13.52%, and by 2010, this had risen to 21.72% (24). [See Appendix A]Comparing Performance to Major CompetitorsThe two largest competitors for Netflix are Apple and Google, both of which are well-financed.While neither focus solely on movie rentals, they have developed similar offerings which maysoon threaten Netflix’s market domination.Apple’s total revenues in 2010 clocked in at $65.2 billion (25), compared to Netflix’s $2.16billion in revenues. A simple explanation exists for this—Apple develops, sells, and distributeshardware and software, which represents a large portion of their earnings. The iTunes on-demand video rental service is only a small segment of their business.Google, Netflix’s second largest competitor, brought in over $29.3 billion in revenues in 2010(26). As is the case with Apple, Google’s revenues come from a wide variety of products andservices, and isn’t limited to the Google TV.[See Appendix B for Comparison] Page | 27
  28. 28. The Future of the IndustryIn the coming years, it is highly probable that a shift will occur in the industry. DVDs couldpossibly fall from the public eye as streaming media moves to replace it completely. Broadbandspeeds and available bandwidth around the U.S. and Canada are increasing, leaving much roomfor video quality improvement. While DVDs represent a significant revenue stream for Netflix,the impact on their revenues may be negligible as the streaming movie library grows andincreases in popularity. Page | 28
  29. 29. Long-Term ObjectivesIn order to stay ahead of the industry and remain competitive, Netflix must set it’s sights for thelong-run. There are several objectives that must be set in order to carry on successfully. Netflixmust continue to build its subscriber base with a focus on customer loyalty. To do this, Netflixneeds to continue the free trial program offered and make every effort to convert free trialmembers into paid subscribers. At the present, Netflix offers a free thirty day trial with no limitsas to how many movies can be rented or watched.Furthermore, Netflix should focus on cultivating more strategic partnerships. TV Manufacturers,mobile device manufacturers, and electronics retailers are just a few of the many avenues thatNetflix could extend to.Finally, Netflix must continue to offer the best customer service possible. High customersatisfaction leads to greater customer retention and a reputation that sells itself. Netflix shouldcapitalize on this for the long-term. Page | 29
  30. 30. Analysis of Strategic AlternativesExternal Factor Evaluation MatrixThe EFE Matrix for Netflix will include five external opportunities for the company and fivethreats posed by the external environment. Netflix’s total score was 2.68, which is above theaverage score of 2.5. This means Netflix is seizing the external opportunities and dealing withthe external threats appropriately. [See Appendix C]Competitive Profile MatrixThe Competitive Profile Matrix (CPM) identifies and compares strengths and weaknessesbetween Netflix and its two closest competitors, Apple and Google. Netflix received a score of3.70; Apple was given a score of 3.05; Google’s score totaled 2.90. At this point in time, Netflixremains a competitive force in the industry. [See Appendix C]Internal Factor Evaluation MatrixThe IFE Matrix assesses Netflix’s current internal strengths and weaknesses. Netflix’s total scorewas 3.19, which is significantly higher than the 2.5 average. Netflix’s has maximized theirinternal strengths and used them to their best ability, while minimizing the potential damage thatcomes from their weaknesses. [See Appendix D] Page | 30
  31. 31. SWOT MatrixThe SWOT Matrix outlines key strengths, weaknesses, opportunities, and threats for Netflix.Whats more, it reveals potential strategies and solutions by matching strengths and weaknesseswith opportunities, and strengths and weaknesses with threats. [See Appendix E]Grand Strategy MatrixThe Grand Strategy Matrix is yet another method Netflix may use for formulating and adoptingalternative strategies. Netflix falls under Quadrant I, and should focus on market development,market penetration, product development, and related diversification. [See Appendix F]BCG MatrixThe BCG Matrix helps determine relative market share position and industry growth for Netflix.More importantly, it highlights Netflix’s largest source of cash flow: DVD rentals (the cash cow)and instant stream movies (the star). [See Appendix G] Page | 31
  32. 32. Strategy RecommendationIn order to ensure success, it is recommended that Netflix adhere to a few key strategies. In theshort-term, Netflix should work towards generating more and more new customers. Incentives,free trials, social media marketing, internet advertising, and strategic partnerships will drive thenumbers further. In the long-term, Netflix should continue to satisfy current customers’ needs byadding new features and improving upon existing functionality. Also, Netflix should beginoffering customer loyalty incentives and promotions to increase customer loyalty to the brand. Page | 32
  33. 33. Strategy ImplementationEstablish Annual ObjectivesBy setting short-term milestones, Netflix will have a greater likelihood of reaching annualobjects, which will enable them to remain successful and profitable in the long-term. With thissaid, Netflix must set benchmarks for desired subscriber counts and they should strive forconsistent revenue growth. Also, in order to realize the mission statement, Netflix’s strategymust include building upon their expansive library of movies, and offer to get them to asubscriber as quickly as possible. Finally, Netflix must continue to improve upon customerservice and quality assurance.Determine PoliciesPolicies are few and far-between at Netflix, as Netflix’s pride lies in the freedom it offers to itsemployees. In order to preserve employee satisfaction and high productivity, Netflix must choosecarefully the policies it wishes to enforce. Outside the realm of disciplinary measures, Netflixshould minimize policies to only what is necessary. Netflix should continue to push towardsdeveloping company culture for increased buy-in by employees. Page | 33
  34. 34. Supporting ProgramsNetflix’s Freedoms & Responsibility Culture is about as close to a perfect supporting program ascan be attained. This culture keeps employees incentivized and helps them adapt to the workenvironment more effectively.Contingency PlansThis is one area Netflix could really improve upon. Netflix has had several outages over thecourse of its life and minimizing these outages is of utmost importance. Netflix should focus ondeveloping fail-safe technologies and work towards preventing these outages by finding the rootcauses. At the very least, Netflix does reward customers for outages generously. Page | 34
  35. 35. Strategy Evaluation and ControlStandards or Targets used as GuidelinesIn order to evaluate the strategies set forth, Netflix should make several assessments. First,Netflix should watch how competitors react to the strategies being executed, and with that,Netflix should observe the changing strategies of its competitors. Additionally, Netflix mustdetermine why competitors are changing their strategies, and whether changing these strategiesleads to measurable success. By keeping a close eye on competitors, Netflix can properlyevaluate how strategic decisions are affecting themselves, as well as the competition. Page | 35
  36. 36. ConclusionTo close, if Netflix continues to actively develop and improve upon their services, they will beout of reach for competitors. Related diversification will allow them to broaden their offeringsand identify additional revenue streams, while continuing with their most profitable services. Asa first-mover, Netflix possesses the expertise, financials, and human capital necessary to pullforward and lead the industry in innovation and value. Finally, if Netflix uses the properstrategies, Netflix will continue to grow profitably, all the while remaining quick and responsiveto shifts and sudden changes in the market. Page | 36
  37. 37. Appendix A Netflix Current Ratios 1.85 1.8 1.75 1.7 1.65 1.6 1.55 2008 2009 2010 Netflix Return on Assets 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2008 2009 2010 Page | 37
  38. 38. Appendix B Revenue Comparison (in billions) $70.00 $60.00 $50.00 Billions $40.00 $30.00 $20.00 $10.00 $0.00 Netflix Apple Google Page | 38
  39. 39. Appendix CEFE MatrixKey External Factors Weight Rating Weighted ScoreOpportunities1. Video game rentals 0.08 2 0.162. 3D TVs 0.11 2 0.223. Lower cost of HD TVs 0.05 1 0.054. Cable TV Subscriptions declining 0.17 4 0.685. Streaming Devices 0.09 3 0.27Threats6. Large corporations entering industry 0.10 3 0.307. DVD rentals declining 0.12 3 0.368. Rental Kiosks (Redbox) 0.06 2 0.129. ISP Bandwidth Caps 0.18 4 0.4810. Cable TV Video-on-Demand 0.04 1 0.04Total 1.00 2.68Competitive Profile Matrix Netflix Apple GoogleCritical Success Factors Weight Rating Score Rating Score Rating ScoreAdvertising 0.20 4 0.80 3 0.60 2 0.40Product Quality 0.10 3 0.30 2 0.20 2 0.20Price Competitiveness 0.15 3 0.45 2 0.30 4 0.60Management 0.05 4 0.20 4 0.20 3 0.45Financial Position 0.10 4 0.40 4 0.40 3 0.30Customer Loyalty 0.15 4 0.60 4 0.60 2 0.30Global Expansion 0.20 4 0.80 3 0.60 3 0.60Market Share 0.05 3 0.15 3 0.15 1 0.05Total 1.00 3.70 3.05 2.90 Page | 39
  40. 40. Appendix D Weight Rating Weighted ScoreInternal Strengths1. Unique Corporate Culture 0.22 4 0.882. Employee Satisfaction 0.10 3 0.303. Talented Employees 0.05 3 0.154. Strong Management Team 0.09 3 0.275. Distinguished Customer Service 0.15 4 0.606. Strategic Partnerships 0.17 3 0.51Internal Weaknesses7. Access to Foreign Markets 0.08 3 0.248. Difficulty Tracking Expenses 0.07 2 0.149. Trouble Obtaining New Releases 0.03 2 0.0610. Lacking Original Content 0.04 1 0.04Total 1.00 3.19 Page | 40
  41. 41. Appendix ESWOT Matrix Strengths Weaknesses 1. High market share 1. Movie content not 2. High profitability exclusive 3. Biggest library of DVDs 2. Pricing power and streaming movies 3. Inability to control 4. Low overhead/fixed costs shipping expense 5. Quick delivery 4. No live content 6. User friendly 5. No original content 7. Well-designed website 8. Streaming movies and shows 9. Competitive prices 10. Strong management team 11. Unique company culture 12. Talented employeesOpportunities SO Strategies WO Strategies 1. Video game rentals 1. Expand to new markets 1. Work with content 2. Branding (S2, O4) producers for exclusive 3. Exclusive distribution 2. Create deals targeted at distribution (W1, O3) 4. International markets customers canceling TV 5. 3D Content service (S9, O6) 6. Cable TV subscriptions decliningThreats ST Strategies WT Strategies 1. Large corporations 1. Diversification of 1. Explore alternate entering market products/services offered distribution methods 2. Digital distribution (S12, T1) (W3, T2) models 3. DVD Vending Machines 4. Keeping enough new inventory to meet demand Page | 41
  42. 42. Appendix FGrand Strategy Matrix Netflix Page | 42
  43. 43. Appendix GBCG MatrixStars Question Marks ‘Instant Streaming’ ServiceCash Cows Dogs Online DVD Rentals Page | 43
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