Netflixs Strategy In 2018 Does The Company Have Sufficient Competitive Strength To Fight Off Aggressive Rivals? Case Solution

2. Introduction 

Netflix is the world’s leading digital entertainment service provider with a large number of paid subscriptions from all over the world. It is a streaming service that allows the subscribers to watch different content, be it movies or TV shows, sitting in the comfort of their homes. However, more and more competitors are entering the market, making the business landscape very competitive. 

The report analyses Netflix Inc.'s strength to fight off aggressive rivals. The first part of the report focuses on the issues that the company is currently facing with respect to its competitive position. These issues arise out of the company's internal strengths and weaknesses, and the external factors that affect it negatively and positively. The second part highlights a number of solutions that the company could adopt given its current situation and then picks out one recommendation that is best suited to the company and makes the most out of its strengths and opportunities available. The third part of the report are appendices that highlight the whole business case. They are divided into two parts; internal and external. The internal analysis focuses on the company's financial strength, its strengths and weaknesses, available resources, strategy, etc. and the external analysis focuses on the position of the market, competitive analysis, industry and economy position, etc. The report then uses these to make a final recommendation.

3. Issue 1: Problems in International Expansion 

Netflix is a global Company with presence in more than 130 countries, as explained in Appendix L. Further, as stated in Appendix M, its long-term business strategy is to undertake global expansion. However, the Company has been facing political issues when it comes to expansion. In China, Netflix faced several barriers when trying to expand into China, the world's most massive entertainment market. (Appendix A) The Chinese government had refused to give license to Netflix, as they wanted to control the content that the residents would see. Apart from the censorship issue, they also wanted to protect the local content providers from foreign competition. Further, the U.S government-imposed restrictions on U.S based countries from entering into some of the markets, such as North Korea, Syria, etc. Netflix is now facing problems with global expansion, which is one of its key success factors, as explained in Appendix G. political reasons and restrictions from certain countries has prevented Netflix from expanding further.

4. Issue 2: Growing Debt and Expenditures

To deal with existing competitors like HBO and Amazon, and to protect itself from new entrants like Walmart, as explained in Appendix B, Netflix enhanced its focus on original content creation, which is now one of its key success factors (Appendix G). However, this has resulted in increased expenditure and increased operational costs, and Netflix is taking on more and more debt to cover its negative operational cash flows, as shown in Appendix H. Netflix has spent multi-billion dollars on new collaborations and original content, which has left the company with negative cashflows. However, as the content is one of Netflix's value-adding players as per Appendix C, it has no choice but to continue spending on value addition.  Moreover, the Company's strategy is cost leadership and differentiation (Appendix M), which the Company is pursuing through original content creation so that it can differentiate itself from its competitors. Further, collaborations with mobile operators to include Netflix titles in devices drove their costs up.

5. Issue 3: Heavy Reliance on third-party Content providers 

A key player in Netflix’s value net analysis is the content providers (Appendix C) which means that part of the company’s value comes from content providers. Appendix K also shows the Company's value chain, in which a key input is licensing agreements from third party content providers. This has given the suppliers a high bargaining power (Appendix B) and they are commanding higher prices for their content. Since Netflix depends on third parties for content, it is forced to pay higher prices for content, as otherwise, it would lose its key success factor (Appendix G) of having the biggest content library. This is also a reason why the Company needs to spend on original content, so it can partly free itself from third-party dependence. This has put the Company in trouble, as going for third party content is costly and risky, and going for original content also raises operational costs by a huge margin. This requires a permanent and sustainable solution that the company needs to focus on.  

6. Recommendation 1: Diversification 

Netflix can diversify into other categories, such as Music. Appendix F provides an analysis of the Company’s competitors, and Amazon, one of the biggest competitors as per Appendix E, has an option of Music streaming. To compete with Amazon, Netflix can consider diversifying into music, as this would decrease its dependence on the few content providers. It would also diversify its products, decreasing some of the risks it is currently facing. As music streaming is an industry that is growing rapidly, it would prove as a good chance for Netflix. However, this would require system development costs and marketing costs, which would add to the Company's existing negative cashflows.

7. Recommendation 2: Create Alliances 

Creating alliances is a feasible option which Netflix has not considered at a large scale. Right now it is under pressure from increased competition, as per Appendix B. Creating alliances with its competitors would reduce the pressure that Netflix is facing right now. It would also help it to manage its cash flows and expenditures on original content properly, as it would have a lower threat. Pairing up with Hulu or HBO can be chosen as this would give them both an edge over Amazon, and more strength to deal with new entrants like Walmart. With alliances, both companies would thrive and co-exist.

8. Recommendation 3: Pairing up with Cable TV 

Pairing up with Live TV could be another option. As Netflix is just about movies and TV shows, partnering with Live TV would enable to opt for live matches, news, and sports. This would target a whole new market. People who have still not shifted to internet streaming and prefer watching Live TV will be targeted by this strategy. This would reduce the Company's dependence on third party content, and would open up another avenue for the company. However, this would incur additional costs for the company, and as shown in Appendix H, the company is not in a position to incur additional costs.

9. Final Recommendation 

Considering the strengths and weaknesses of Netflix, its internal and external key factors, and the issues that it is currently facing, the most feasible option for Netflix at this moment would be to form alliances with one or two of its competitors. Considering the Company's negative operating cash flows, and its multi-billion dollar investments on new content, any more expenditure for the company is not feasible at this stage. Further, the company is indebted and does not have enough financial strength to fight its existing competitors and new entrants. Therefore, the most feasible option would be to form an alliance with Hulu. This would give Netflix an edge over Amazon and would give Netflix access to 20 million of Hulu's subscribers. Further, it would also help Netflix is expanding to other countries, as the other brand would have different product designs that would enable it to access other markets. Also, this would reduce the competitive pressure from Netflix, and the company will be able to manage its outflows and expenditures efficiently.

10. Conclusion

Netflix is an internet streaming service provider that has a business model highly dependent on third-party content providers. Further, it has severe growing competition from existing and new players. To deal with competitors, Netflix invested heavily in developing its original content, thereby harming its debt levels and operational cashflows. A recommended solution to this problem after considering the business case of Netflix, which is explained in Appendices A-M below, is to form alliances with its competitors. This would reduce the competitive pressure on Netflix, and would give the Company access to new markets, and at the same time help it materialise on its key strengths that have been identified through its strategy and external and internal environment analysis.

Appendix A: PESTEL Analysis 

Appendix B: Five Forces Analysis