Netflix Case Questions

Case: Netflix’s Strategy in 2018 Assignment Questions
1.How strong are the competitive forces in the rapidly evolving global market for streamed
video content? Do a five-forces analysis to support your answer.
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Supplier power – strong – With there not being many suppliers in this industry, the bargaining
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power that suppliers have is strong. It is vital for companies to make connections and establish
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relationships with all the suppliers they can to ensure their network of tv shows, movies, and
online streams are running smoothly and that they can acquire the best and latest movies and
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shows.
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Buyer’s power – Weak – Buyer power is weak in this industry. One buyer is not critical to the
market with this being an industry that services a large group of people. One buyer does not have
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a critical impact on profitability in this industry.

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Threat of Substitutes – Moderate – There are substitutes available like live cable tv and YouTube
tv. These are options that allow people to watch live television rather than having a subscription
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to these streaming services. There are also affordable options like owning a DVD movie or DVD
tv series and not having to pay for anything other than the one time purchase.
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Threat of New Entry – moderate – The threat of new entrants is moderate in this industry.
Through the increase of online streaming networks, the industry is likely to continue growing
and increasing in the number of competitors.
Competition with Rivals – Strong – There is a strong competition between rivals. Hulu, Netflix,
HBO GO, and Amazon Video competing for market share and who can have the best library to
attract customers. This is a strong force that drives the rapidly evolving market of this industry of
each service trying to be better than the other.
2.What forces are driving change in this “new” global industry? Are the combined impacts
of these driving forces likely to be favorable or unfavorable in term of their effects on
competitive intensity and future industry profitability?
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The increasing globalization is a major driving force in this industry. This sets these types of
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subscriptions apart from other online streaming competitors. Another driving force would be the
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technology that sets it apart from other options. They are able to hold hundreds of different
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television series and movies in their library while offering each of them on demand to their
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subscribers. With the internet capabilities at hand and offering their services through apps you
can access these services on any device that connects to internet. This is a huge driver in this
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industry. These impacts are favorable in term of their effects on the competitive and future
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profitability of the industry. The more global that these streaming services go the more profitable
they can be. As they continue to grow even more than what’s currently at hand technologically,
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they will become even more profitable since they can reach even more viewers and subscribers.
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3.What does your strategic group map of this industry look like? How attractively is Netflix
positioned on the map? Why?
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Netflix is positioned in an attractive spot. They are more international than their competitors with
Amazon Prime being the closest to them in this area but are offered at a moderately low price.
This gives them the ability to continue to grow and become more profitable by offering their low
prices in new areas where customers will be more attracted to them than Amazon Prime Video.
4.What key factors will determine a company’s success in this industry in the next 3-5
years?
Pricing Strategy – Viewers are price sensitive and do not want to pay an overwhelming amount
for this service. Having a good pricing strategy to offer a low cost and offer great value with the
options available in the library is very important.
Technology – It is important to offer your service on a platform that is accessible by the majority
of your target market. Having the technology to offer the service to cellular devices, laptops,
televisions, gaming systems, etc. is essential in this market.
Convenience – It is important to have the functions of the service perform correctly to make the
service convenient for the subscriber. Being able to set shows/movies on a list, being able to save
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where you left off, being able to sort by genre, and things like this are essential to make the
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platform easy for the consumer to use.
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Marketing – It is essential to market these services and show why one is better than the
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alternatives. Having different marketing strategies to retain the current subscribers is just as
important. Offering things like a first month free trial (or something of this nature) is a great way
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to offer future subscribers an opportunity to check out the library and how convenient the use of
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the platform is.

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Content – This is arguably the most important key success factor. Having licensing from top
movies and television shows is important in order to offer the content subscribers are looking for.
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Having top tier content leads to more subscribers and higher profitability.
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5.What is Netflix’s strategy? Which of the five generic competitive strategies discussed in
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Chapter 5 most closely fit the competitive approach that Netflix is taking? What type of
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competitive advantage is Netflix trying to achieve?
Netflix’s current strategy is the broad differentiation provider strategy. They are not offering
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their service at the lowest cost in the industry, but they are offering a wide variety of options for
consumers. Netflix strives to offer a user-friendly experience with their platform that you can
access wherever you are. They have also started to offer their own brand of tv shows and movies
that are Netflix Originals. Doing this leads to offering content that no other service has the
opportunity to offer to their client base. They are trying to establish a competitive advantage of
offering exclusive, differentiated content that can only be found on their platform for a great cost.
While they are not offering the lowest overall cost, they are offering content that you cannot find
on any other platform. This is a huge competitive advantage that they have on their main
competitors that they can offer this high-level content and a lower cost than most.
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6.What does a SWOT analysis of Netflix reveal about the overall attractiveness of its
situation?
Strengths Weakness
-Easy to use -High operating cost
-Differentiated content that is exclusive -Lack of owning copyrights
-Global Presence
Opportunity Threats
-Further market expansion -Threat of competition
-Establishing plans to lower their cost -Foreign government regulations
It shows that they are attractive in their current situation since the strengths that they hold are
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very important in the industry. They are also in a state to where they are capable of growing and
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improving what they currently have. The threats they are facing can hurt them, but they also have
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opportunities to improve that can counteract their weaknesses and some posing threats.
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Establishing lower costs and continuing to expand can counteract the threat of competition and
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the current high costs they are experiencing. They must find how to counteract the threat of
foreign regulations, but they currently sit in an attractive spot in the industry.
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7.What is your appraisal of Netflix’s operating and financial performance based on the
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data in case Exhibits 1, 2, 5, 6, and 7? What positives and negatives do you see in Netflix’s
performance?
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Profitability 2015 2016 2017

(in millions)
Gross Profit Margin 6,779.5-4,591.5 8,830.7-6,029.9 11,692.7-7,659.7
6,779.5 8,830.7 11,692.7
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=32.27% =31.72% = 34.49%

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Operating Profit 305.8 379.8 838.7

Margin 6,779.5 8,830.7 11,692.7
=4.51% =4.30% =7.17%
Leverage 2015 2016 2017
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(in millions)
Debt to Equity 2,371.4 3,364.3 6,499.4
Ratio 2,223.4 2,679.8 3,581.9
=1.067 =1.255 =1.815
Their financials show that their profit margins are increasing even though their gross profit
margin does take a slight decline in 2016. The gross profit margin does recover in 2017,
however. They have increased their debt in recent years which could pose a future issue. Even
while accumulating more debt which is a negative, the major positive is the continuation of
generating higher profits. Their operating profit margins have grown which as well is an
important positive to analyze. Their operating profit margins are still lower than you would like
them, but there is room to grow with this and they have demonstrated that they can improve this.
There are negatives like their debt and lower operating profits due to their high operating costs,
but there are key positives like their profitability and their improvement in operating profit
margin.
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8.How does Netflix’s competitive strength compare against that of its primary rivals as of
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2018? Do a weighted competitive strength assessment using the 14 methodology presented
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in Table 4.4 in Chapter 4 to support your answer. Based on your assessment and
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calculations, does Netflix have a net competitive advantage over some/all of these rivals?
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Netflix Hulu Amazon Prime
Importance Strength Weighted Strength Weighted Strength Weighted

KSF/StrengthMeasure
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Weight Rating Score Rating Score Rating Score

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Quality/Product
.2 7 1.4 6 1.2 7 1.4
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Performance
Marketing/Image .15 7 1.05 5 .75 7 1.05
Technological
.25 9 2.25 7 1.75 8 2
Components
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Location/Atmosphere .15 8 1.2 6 .9 9 1.35

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Low Cost/Pricing .25 9 2.25 10 2.5 8 2

Overall Weighted Competitive Strength Rating 8 7.5 7.8
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Based on my assessment, Netflix is in good standing with their primary rivals and sit ahead of
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them. They have a net competitive advantage on their rivals in almost every category. They do
not have the lowest cost, but they have better technological components and just as good, if not
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better, of quality and image than their competitors. They have the strongest total weighted
competitive strength rating with Amazon sitting close behind them. There is room for
improvement in each area, but Netflix is doing great.
9.What 3-4 top priority issues does Netflix management need to address?
Three priority issues for Netflix to address would be their long-term debt and how that can affect
their financials in the future, the threat of livestreaming substitutes, and their lack of retaining
content in their library. These are all issues that can make or break profitability in the future.
10.What recommendations would you make to Netflix CEO Reed Hastings? At a minimum,
your recommendations should cover what to do about each of the top priority issues
identified in question 9.
I would recommend that Netflix focus on their original content in order to add more brand equity
to their name and to further differentiate themselves from their competition. In doing this, they
cannot lose the licenses to shows and movies and they can forever retain this content in their
library. By signing on well-known actors they can put together must-watch TV shows and
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movies like they have been doing. This can continue to grow their customer base and allow them
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to become more profitable since more people will want to reissue their subscriptions in order to
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watch the shows they can only find on Netflix. I would also recommend that Netflix look into
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ways to offer livestreaming of television shows on air, sports, and news to attract even more
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people. Waiting for a season that is already on air to finally upload to Netflix months later can be
frustrating. Being able to watch it live, or even on a small delay, would attract viewers to Netflix
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and could potentially put Netflix ahead of cable. Being able to do this would also eliminate the
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threat of substitutes and potentially new entrants as well. Another recommendation would be to
begin eliminating the debt they have before it emerges as a major issue. They are accumulating
this debt to make sure their original content can happen, but if they were to try to lower the costs
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of some agreements they currently have, or even terminate some tv networks they have, they
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could begin lowering the debt they are accumulating to currently focus on their original content.
By offering these livestream options they can also generate even higher amounts of cash flow
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and try to eliminate debt in this way too. I recommend finding a solution of eliminating some of
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the network agreements they have for certain content that they are paying high dollar for and
focusing their resources on original content first and other networks second. In doing this they
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can lower their debt and focus on producing great content first and foremost.
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Case: Netflix’s Strategy in 2018 Assignment Questions

a critical impact on profitability in this industry.

the platform is.

competitive advantage is Netflix trying to achieve?

Profitability 2015 2016 2017

=32.27% =31.72% = 34.49%

Operating Profit 305.8 379.8 838.7

Importance Strength Weighted Strength Weighted Strength Weighted

Weight Rating Score Rating Score Rating Score

Location/Atmosphere .15 8 1.2 6 .9 9 1.35

Low Cost/Pricing .25 9 2.25 10 2.5 8 2

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