Strategic Management Process – NETFLIX – A Case Study – (Sample Assignment)

18PDH102T : ASSIGNEMENT (2020-21 : EVEN)

TOPIC: A STUDY OF STRATEGIC MANAGEMENT PROCESS OF NETFLIX

LIST OF CONTENTS

Introduction to the company:

The strategic management process
Step 1 : Identify and Analyse current mission, objectives and strategies
MISSION
OBJECTIVES
Short Term Objectives
Long term objectives
STRATEGIES(Current)

STEP 2: Analysis of organisational resources and capabilities

Core competencies
SWOT analysis
Porter's five forces analysis of netflix

STEP 3: Strategies used by organisations

Levels of Strategy
Netflix’s Growth Strategies

Additional step: Strategy formulation

Netflix’s Generic Competitive Strategy
BCG Matrix of NETFLIX

STEP 4: Strategy Implementation

Corporate Governance:
Management practices and systems
Strategic leadership

STEP 5: EVALUATE RESULTS

Strategic control
Review of the strategic management process as necessary

1
 Strategic Management Process – NETFLIX – A Case Study – (Sample Assignment)

Introduction to the company:

Netflix is an American public company involved primarily in providing Internet-based and
subscription-based streaming media, distribution of film and television contents on the Internet,
and video content production. The company is headquartered in Los Gatos, California and it has
several regional locations in Latin America, Europe, South Asia, East Asia, and Southeast Asia,
as well as subsidiary offices in the United Kingdom and Singapore.
Netflix started as an online-enabled DVD rental-by-mail business that used a monthly
subscription model instead of a single-rental model that was typical in most video rental stores.
The company provided its customers with unlimited rentals at a fixed rate with extended due
dates. Hence, when it was launched in 1998, the business model of Netflix was the first of its
kind in the world.
Netflix started to offer streaming content in February 2007 and began moving away from its
core DVD rental business. Today, the company has over 130 million paid subscribers in over
190 countries. Of course, it is competing against other streaming service providers such as
YouTube and Amazon, the streaming services of TV networks and Hollywood producers such
as HBO and Fox Entertainment, and other similar competitors such as HOOQ and iFlix, among
others. Understanding the success of Netflix and how it competes against other similar
businesses requires an understanding of the key elements of its business strategy.

The strategic management process

Strategic management is the process of formulating and implementing strategies to accomplish
longterm goals and sustain competitive advantage. The essence of strategic management is
looking ahead, understanding the environment and the organisation, and effectively positioning
the organisation for competitive advantage in changing times.

Step 1 : Identify and Analyse current mission, objectives and strategies

MISSION
Netflix’s mission statement is “We promise our customers stellar service, our suppliers a
valuable partner, our investors the prospects of sustained profitable growth, and our employees
the allure of huge impact.”
Netflix Inc.’s mission statement targets the entertainment market. The online company’s
strategic management uses the corporate mission statement to guide higher performance
achievement. Netflix’s operations management accounts for multinational business growth,
including that of subsidiaries and franchises like StoryBots. Based on its corporate mission
statements, the company targets the international entertainment market’s biggest share, as
executives seek new partnerships to penetrate current and new markets. Furthermore, Netflix’s
mission statements keep the business open to diversification into other markets that are not
limited to online media. This possibility points to potential higher growth and expansion of the
movie streaming business, in line with the corporate mission statement’s aims in entertainment
products and. Despite challenges regarding competitors’ similar strategic initiatives, Netflix
satisfies the strategic requirements of its corporate mission.

2
 Strategic Management Process – NETFLIX – A Case Study – (Sample Assignment)

OBJECTIVES
Objectives (Short Term Objectives)

i. Subscription and revenue

Netflix had an target/projection(objective) of increase of 30% per annum in subscriber base and
in the last four years, Netflix's paid subscription grew at an average rate of 26%. In the first nine
months of 2019, they grew at only 21% year over year.
Netflix had a revenue target of 33.33% increase and the company's revenues grew at an average
rate of 30% in the last four years and at an average of only 26% in the first three quarters of
2019.

Additionally, Netflix has made impressive growth in international markets. It is already making
inroads in the Latin America, Europe, Middle East, Africa, and Asia Pacific markets. To give
this growth a further boost, Netflix is coming up with 130 seasons of original local-language
content in the international markets.

ii. Content Development

Netflix spent around $15 billion on content in 2019, with the bulk of it on original programs.
Moreover, the number of Oscar and Golden Globe nominations earned by Netflix reflects its
intent to make quality content. Over the next few years, Netflix's library of original content
should grow stronger

iii. Containing cost escalation

Admittedly, the cost of producing its own shows has been high for Netflix. It has been spending
far more cash than it earned over the past few years. Netflix expects to remain cash-flow
negative over the next several years. However, it expects its free cash flow to start improving in
2020 thanks to a steady rise in its operating margin from 10% in 2018 to 13% in 2019 and 16%
in 2020. Netflix's big and growing subscriber base should continue to help it in improving
revenues as well as margins.

Long term objectives include

Becoming the best global entertainment distribution service
Licensing entertainment content around the world
Creating markets that are accessible to filmmakers
Helping content creators around the world to find a global audience

STRATEGIES (Note to students: This is just outline, small explanation should be added
here as in Mission and Objectives)

i. Internationalization and Localization Strategy

ii. Diversification Strategy through Content Production
iii. Marketing Strategy and Marketing Activities
iv. Technological Strategy and Capability Building

STEP 2: Analysis of organisational resources and capabilities

3
 Strategic Management Process – NETFLIX – A Case Study – (Sample Assignment)

Core competencies: Delivering visual content right to its customers’ homes in the most
convenient way available has been a core competency of Netflix for long period.

SWOT analysis of strengths, weaknesses, opportunities and threats

Netflix’s Strengths and Weaknesses (Internal Analysis)

Strengths:
1. High brand equity of Netflix
2. Large platform of content producers and consumers
3. Capacity for original content creation

Weaknesses:
1. Imitable business model
2. Dependence on content producers
3. Dependence on Internet service providers

Netflix’s Opportunities and Threats (External Analysis)

Opportunities:
1. Growth through expansion of product mix
2. Penetration in new markets
3. Business diversification into other industries or markets
Threats:
1. Competition and imitation
2. Entertainment media/content piracy
3. Cybercrime

Porter's five forces analysis of netflix

Threat of New Entrants

The threat of new entrants a weaker force within this industry

The economies of scale is fairly difficult to achieve in the industry in which Netflix Inc
operates.
The product differentiation is strong within the industry, where firms in the industry
sell differentiated products rather a standardised product.
The capital requirements within the industry are high, therefore, making it difficult for
new entrants to set up businesses as high expenditures need to be incurred. Capital
expenditure is also high because of high Research and Development costs.

The access to distribution networks is easy for new entrants, which can easily set up
their distribution channels and come into the business. With only a few retail outlets
selling the product type, it is easy for any new entrant to get its product on the shelves.
All of these factors make the threat of new entrants a strong force within this industry.

4
 Strategic Management Process – NETFLIX – A Case Study – (Sample Assignment)

Netflix Inc can take advantage of the economies of scale it has within the industry,
fighting off new entrants through its cost advantage.

Bargaining Power of Suppliers

The number of suppliers in the industry in which Netflix Inc operates is a lot compared
to the buyers. This means that the suppliers have less control over prices and this makes
the bargaining power of suppliers a weak force.
The product that these suppliers provide are fairly standardised, less differentiated and
have low switching costs. This makes it easier for buyers like Netflix Inc to switch
suppliers. This makes the bargaining power of suppliers a weaker force.
The suppliers do not contend with other products within this industry. This means that
there are no other substitutes for the product other than the ones that the suppliers
provide. This makes the bargaining power of suppliers a stronger force within the
industry.
The suppliers do not provide a credible threat for forward integration into the industry
in which Netflix Inc operates. This makes the bargaining power of suppliers a weaker
force within the industry.
The industry in which Netflix Inc operates is an important customer for its suppliers.
This means that the industry’s profits are closely tied to that of the suppliers. These
suppliers, therefore, have to provide reasonable pricing. This makes the bargaining power
of suppliers a weaker force within the industry.

Netflix Inc can purchase raw materials from its suppliers at a low cost. If the costs or
products are not suitable for Netflix Inc, it can then switch its suppliers because
switching costs are low.

Bargaining Power of Buyers

The bargaining threat of buyers a weaker force within the industry.

The number of suppliers in the industry in which Netflix Inc operates is a lot more than
the number of firms producing the products. This means that the buyers have a few firms
to choose from, and therefore, do not have much control over prices. This makes the
bargaining power of buyers a weaker force within the industry.
The product differentiation within the industry is high, which means that the buyers are
not able to find alternative firms producing a particular product. This difficulty in
switching makes the bargaining power of buyers a weaker force within the industry.
The income of the buyers within the industry is low. This means that there is pressure
to purchase at low prices, making the buyers more price sensitive. This makes the buying
power of buyers a weaker force within the industry.

5
 Strategic Management Process – NETFLIX – A Case Study – (Sample Assignment)

Netflix Inc can focus on innovation and differentiation to attract more buyers. Product
differentiation and quality of products are important to buyers within the industry, and
Netflix Inc can attract a large number of customers by focusing on these.

Threat of Substitute Products or Services

There are very few substitutes available for the products that are produced in the
industry in which Netflix Inc operates. The very few substitutes that are available are also
produced by low profit earning industries. This means that there is no ceiling on the
maximum profit that firms can earn in the industry in which Netflix Inc operates. All of
these factors make the threat of substitute products a weaker force within the industry.
The very few substitutes available are of high quality but are way more expensive.
Comparatively, firms producing within the industry in which Netflix Inc operates sell at a
lower price than substitutes, with adequate quality. This means that buyers are less likely
to switch to substitute products. This means that the threat of substitute products is weak
within the industry.

Netflix Inc can focus on providing greater quality in its products. As a result, buyers
would choose its products, which provide greater quality at a lower price as compared to
substitute products that provide greater quality but at a higher price.

Rivalry Among Existing Firms

The rivalry among existing firms a weaker force within the industry.

The number of competitors in the industry in which Netflix Inc operates are very few.
Most of these are also large in size. This means that firms in the industry will not make
moves without being unnoticed. This makes the rivalry among existing firms a weaker
force within the industry.
The very few competitors have a large market share. This means that these will engage
in competitive actions to gain position and become market leaders. This makes the rivalry
among existing firms a stronger force within the industry.
The industry in which Netflix Inc is growing every year and is expected to continue to
do this for a few years ahead. A positive Industry growth means that competitors are less
likely to engage in completive actions because they do not need to capture market share
from each other.
The products produced within the industry in which Netflix Inc operates are highly
differentiated. As a result, it is difficult for competing firms to win the customers of each
other because of each of their products in unique. This makes the rivalry among existing
firms a weaker force within the industry.
The exit barriers within the industry are particularly high due to high investment
required in capital and assets to operate. The exit barriers are also high due to
government regulations and restrictions. This makes firms within the industry reluctant to

6
 Strategic Management Process – NETFLIX – A Case Study – (Sample Assignment)

leave the business, and these continue to produce even at low profits. This makes the
rivalry among existing firms a stronger force within the industry.

Netflix Inc needs to focus on differentiating its products so that the actions of
competitors will have less effect on its customers that seek its unique products.
As the industry is growing, Netflix Inc can focus on new customers rather than
winning the ones from existing companies.
Netflix Inc can conduct market research to understand the supply-demand situation
within the industry and prevent overproduction.

Implications of Porter Five Forces on Netflix Inc

By using the information in Netflix Inc five forces analysis, strategic planners will be
able to understand how different factors under each of the five forces affect the
profitability of the industry. A stronger force means lower profitability, and a weaker
force means greater profitability. Based on this a judgement of the industry's profitability
can be made and used in strategic planning.

STEP 3: Strategies used by organisations

Levels of Strategy (Note to Students: Write small note on the three levels of strategy by
the organization)
Netflix Inc.’s organizational structure is hierarchical but with modifications that account
for business flexibility and responsiveness to global market changes. Netflix Inc.’s
corporate structure is based on the business need to make rapid decisions as a way to
respond to changes in the online entertainment market.
Strategic initiatives from Netflix’s CEO are disseminated downward through vertical
lines of authority and communication. Despite this hierarchical design, the company’s
organizational structure is relatively flat because of the minimized levels of middle
management, enabling the business organization to rapidly respond to changes in the
entertainment industry.
The business level strategy is divided into Original Programming and other Content.

Netflix Inc.’s overall business model is a hybrid of various business models. Netflix’s
operations exhibit the following business models:

Platform (digital media marketplace) and Pipeline (entertainment content production,

etc.) business models
Cutting-out-the-middleman business model (production to distribution)
Unlimited subscription business model (revenue model for unlimited online access)

7
 Strategic Management Process – NETFLIX – A Case Study – (Sample Assignment)

Netflix is currently using growth and diversification strategy and it will continue to do so
in the next few years. In Growth strategy it is using backward integration (that is
becoming a supplier) by producing own Series and movies.

Netflix’s Growth Strategies (Note to Students: A one line explanation needed)

i. Market Penetration
ii. Market Development
iii. Product Development
iv. Diversification

Additional step: Strategy formulation

Netflix’s Generic Competitive Strategy

Cost Leadership: Netflix Inc.’s generic strategy is cost leadership, which in Michael E.
Porter’s model ensures competitive advantage through minimized costs and, frequently,
minimized selling prices. This generic strategy enables the online entertainment
company’s business model’s competitiveness based on low costs and the corresponding
ability to sell at affordable prices, without necessarily being a best-cost provider. In this
generic strategy, Netflix broadly acquires more customers in the online entertainment
market, in contrast to focus strategies that concentrate on specific market segments. For
example, the media streaming company uses its competitive advantages to reach more
customers in the international market. This broad approach of the generic strategy aligns
with Netflix’s intensive growth strategies, which prioritize market penetration. The
approach relies on the company’s business model and value chain, which satisfy
customers partly through personalized customizations, such as in mobile app settings.
Through intensive growth strategies, the cost leadership generic strategy for competitive
advantage gains the biggest market share, relating to Netflix Inc.’s corporate mission and
vision statements, which point to the strategic plan and goal of attaining and maintaining
leadership in the international online entertainment industry.

Differentiation: Even though Netflix mainly applies cost leadership as its generic
strategy for competitive advantage, the business also uses differentiation in its operations.
As a generic strategy, differentiation involves developing the online business and its
products in ways that make them different from the competition. For example, Netflix
develops its competitive advantage by producing its own original content, aside from
streaming content from third parties. The differentiation generic strategy enables the
business model to attract and retain customers, thereby supporting intensive growth
strategies for further expansion of the online operations.

8
 Strategic Management Process – NETFLIX – A Case Study – (Sample Assignment)

BCG Matrix of NETFLIX

Stars

Those segments comes under the category of stars which have high industry sales growth
rate and high relative market share. Netflix international streaming segment comes under
the category of stars. Netflix market occupy the highest place in the market share of
international streaming. Thanks to the quality of streaming and contents Netflix is on the
top of international streaming list. The contents which boosted the subscribers of Netflix
are as follow, The Crown, Stranger things, Orange is the new black and 13 reasons why,
Glow and last but not the least house of cards. Domestic streaming segment of Netflix
also comes under the category of stars because in United States more and more people
are shifting from traditional cable networks towards Netflix streaming, the industry sales
growth is increasing rapidly and Netflix occupy the fare share in the domestic streaming
market around 60 %. Which is increasing as the time passes by, both the segments of
Netflix are doing well in terms of market share.

Cash Cows

Cash cows are those segment which compete in low growth industry and have high
relative market share. The industry growth rate declined over the years because many
people now prefer to stream online. However, Netflix still have the highest rate of
subscription in DVDs. Netflix should explore other markets where blue Ray is still in
demand in that way they can increase their market share. But still DVD segment of
Netflix is leading domestically.

Question Marks

None of Netflix segments come under the category of question mark. Those segments
comes under the category of Question mark, which have low relative market share and
operates in high sales growth industry.

Dogs

None of Netflix segments come under the category of dogs. However, those segments are
included into the category of Dogs, which operates in low sales growth industry and have
low relative market

9
 Strategic Management Process – NETFLIX – A Case Study – (Sample Assignment)

STEP 4: Strategy Implementation

Corporate Governance:

The hallmark of good corporate governance is an independent-minded board of directors

to oversee management and represent the interests of shareholders. Its primary
responsibilities are to hire and replace the CEO as needed, monitor performance, review
and approve strategy, and assess financial reporting and risk management.
Netflix takes a radically different approach to information sharing with the goal of
significantly and efficiently increasing transparency among the CEO, executive team, and
board of directors. The Netflix approach incorporates two highly unique practices: (1)
board members periodically attend (in an observing capacity only) monthly and quarterly
senior management meetings, and (2) board communications are structured as
approximately 30-page online memos in narrative form that not only include links to
supporting analysis but also allow open access to all data and information on the
company’s internal shared systems including the ability to ask clarifying questions of the
subject authors. This quarterly memo is written by and shared with the top 90 executives
as well as the board.

Founder and CEO Reed Hastings believes that these two practices improve the ability of
the board to provide what he calls an “extreme duty of care” to the corporation: “The
board isn’t going to have the confidence to make hard decisions unless they really
understand the market and the company.”

Management practices and systems (Note to Students: A one line explanation needed)
Independent decision-making (Autonomy)
Open, broad, and deliberate information sharing (Communication)
Extraordinary candidness (Attitude)
Focus on high effectiveness (Productivity and Effectiveness)
Rule avoidance (Rules and Organizational Rigidity)

Strategic leadership
The Netflix approach to board governance is rooted in and reflective of the company’s
leadership. The Netflix culture emphasizes individual initiative, the sharing of
information, and a focus on results rather than processes. Reed Hastings, the CEO,
empowers his workforce, believes they are sophisticated enough to manage an
autonomous-driven work environment and will ultimately do what is right for Netflix. To
reinvent the company’s human resource policies so radically can be viewed as a
testament to Hastings creative intelligence and transformational leadership abilities.
Hastings believes that creating a company culture at Netflix centered on traditional
corporate practices would not work and negatively impact motivation, attitudes, behavior
and performance.

10
 Strategic Management Process – NETFLIX – A Case Study – (Sample Assignment)

STEP 5: EVALUATE RESULTS

Strategic control (Note to students: write the control measure by the organisation)

Strategic control is concerned with tracking the strategy as it is being implemented,

detecting problems or changes in the premises and making necessary adjustments. In
contrast to post- action control, strategic control is concerned with controlling and
guiding efforts on behalf of the strategy as action is taking place.

Strategic control is related to that aspect of strategic management through which an

organization ensures whether it is achieving its objectives contemplated in the strategic
action. If not, what corrective actions are required for strategic effectiveness.

Strategic controls are intended to steer the company towards its long-term strategic
direction. After a strategy is selected, it is implemented over time so as to guide a firm
within a rapidly changing environment. Strategies are forward-looking, and based on
management assumptions about numerous events that have not yet occurred.

Traditional approaches to control seek to compare actual results against a standard. The
work is done, the manager evaluates the work and uses the evaluation as input to control
future efforts. While this approach is not useless, it is inappropriate as a means to control
a strategy.

In Netflix there is no separate Control (Quality Control) group within Netflix to ensure
the strategy implementation. The official reason for this is because at Netflix everybody
owns control. In theory, this is a great ideal, with a focus on control each stage in the
process, from content creation to final sign off.

Review the strategic management process as necessary

----------------------------END OF REPORT------------------------------

11