The CEO of Netflix, Reed Hastings had a vision to provide home movie service which would be more enjoyable and satisfying to the customers, as opposed to the traditional rental of home movies. As this idea came in the late nineties, it was something innovative and had great potential. The operational strategy and business model they used had affected the retail video rentals market. In the beginning DVD’s were offered on a fee per use, then in 1999 they implemented monthly subscription services. Their subscribers account for over 44 million up to today.1
Maintaining and ensuring customer loyalty is the key strategy. Netflix was selected as number one online retailer by the FGI research. They achieve this by their vast collection of retables, fast delivery services and the fact they make it incredibly easy to use.
Strategic and Financial Performance
1. Strategic Analysis
Age of consumers- there exist certain governmental limitations for the age appropriateness. Videotape protection act- protects video rental consumers and ensures that no confidential personal information is going to be released. This is a strictly confidential policy among video rental businesses.
Recession- due to economic crisis companies needed to find a way to cut costs. Having movie rentals online can help reduce costs greatly. Costs- movie rentals are done maily online, it reduces the economic cost.
Changes in lifestyle- technology made people lazy. Statistics show that technology demotivates people to leave their houses since they can watch movies, socialize, play games online more then ever. Online streaming trends- people are in constant search of free goods. Looking for cheaper and easy ways to watch the movies they want.
Internet speed- improving over the years and improvement in technology allowed movie rentals online to become incredibly easy to use. Technological improvement- nowdays there exist rental vending machines located all over the town’s places, there is no need to go directly to a movie rental store. In the past this was not possible.
Porter’s Five Forces
Netflix has very high competition, considering that there exsists a large number of movie rental and streaming services on the market. From the time that consumers were buying DVD’s constantly, we came to the time when consumers are streaming movies and TV series on the internet, and they don’t even have to stand up from their chairs, technological capabilities that are evolving have enabled us this opportunity. Competiton is constantly increasing, and the entry barriers to the market are very low. Rivarly among competiton is high, while the consumers switching costs are low, making them switch to another company very easy and at low or no cost.
Therefore the possession of unique product differentiation is of uttermost importance to a company. Availability of substitutes for products is very high in number, and those substitutes offer comparable features. When combined with low switching costs, it poses a difficulty for the company. Since buyers of Netflix are definitely internet users, they have availability of information of those substitutes and this goes in favor of their bargaining power which is high. Buyers in the movie rental industry are price sensitive and go for high premium products. Their demand is constantly increasing. The movie rental industry is depending on the number of people which are subscribed to it, and the higher the number, the more competitive prices Netflix is able to offer and observe economies of scale for the distribution of their rentals.
When all of these five forces are put together, a conclusion that can be drawn is that strong forces of competition make it hard to be profitable on a sustainable level. Efficient strategies have to be implemented in order to obtain sustainable profitability.
One of the advantages Netflix possesses is that it allows unlimited direct streaming, and this combined with the fact that it was the first company to describe a new niche market, puts them ahead of some competitors. However, Netflix will need to assess and accept changes where needed in order to remain profitable in the market of mail rental services.
2. Financial Analysis
Netflix has managed to maintain profitable, with a steady rate of growth of online streaming movie market and mail rental. They have done well during the financial crisis most difficult times, and their rate of growth is of average 20% over the last years. However the financial crisis did have an impact on their growth in 2007 and 2008, with the average growth rate of 13.22%. Product costs have fluctuated only up to 4% and have been around 60% of revenue. Total revenue has been steadily growing.
Manufacturing and operational costs have been difficult to be controlled. The growth of Netfilx indicates the increase in inventory-which are their rentals and the number of distribution points. Their revenue inflows are predictable, since they are independent of rental or late fees. Overhead costs are low which contributes to the profits generated, there exist no costs of renting a store, paying salaries or utilities. Their growth is viewed as strong.
Return on Assets
Netflix is generating most revenues from a saturated market, and it is a commendable fact that in 2009 their ROA was 17.05%, this clearly shows that their decision for investments in assets are appropriate ones, bringing them high returns.
Return on Equity
Return on invested capital
Return on revenue
Working capital Turnover
Fixed assets turnover
Total asset turnover
Recommended Set of Actions
Since Netflix’s competitive advantage comes from the fact that it was an innovation and idea that came first for online rental, they make it hard to imitate them. Their services are based on monthly subscriptions, and own a patent on the method of selection of web based DVD’s. Customers create loyalty to a brand name, and they pay attention to details and how they are valued and appreciated. Netflix has invested time, effort and money into building a strong brand name and the quality of their services. – Reed Hastings, co-founder 2001 From the Netflix case study where the Video on demand is mentioned, it is highly recommended that Netflix starts connecting with cable providers and by this technologies which are connecting pc’s with TV can emerge.
By using the cable providers of network Netflix can build their own core competencies, which are the key to sustainable competitive advantage. This would minimize the risks of not catching up with emerging technologies, and enable Netflix to penetrate into video on demand market quickly and with more stability. Advantage of this is that it would expand Netflix’s customer base to the users of the cable providers. Netflix should keep up to date with changes and innovations to make sure to adapt and make changes if needed when the technologies for this type of connectivity become available.
Shih, Willy C., Stephen P. Kaufman, and David Spinola. “Netflix.” Harvard Business School Case 607-138, May 2007. (Revised April 2009.) https://pr.netflix.com/WebClient/loginPageSalesNetWorksAction.do?contentGroupId=10476&contentGroup=Company+Facts