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THE STRATEGIC ANALYSIS OF NETFLIX, INC

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DOI: 10.13140/RG.2.2.26185.42080

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 THE STRATEGIC ANALYSIS OF NETFLIX, INC

by

Adetokunbo Asaye Bobmanuel

A paper submitted to the Virginia University of Lynchburg as required for Doctor of

Health Administration (DHA 806- Global Strategy)

August 20, 2022

1
ABSTRACT

This paper focuses on Netflix, the market position, the strategic analysis of factors

impacting its market position, and recommendations on how to gain a competitive advantage in

the streaming market and sustain the lead market position. Considering how the organization is

currently losing its subscribers which is mostly due to password-sharing and strong competition

from other streaming companies, I will be doing the SWOT analysis to determine the strength,

weaknesses, opportunities, and threats, and using PESTEL to determine the external factors

facing Netflix. I will recommend a Blue Ocean strategy to stay afloat and gain a competitive

advantage in the streaming market. Adopting a strategy of low cost, differentiation improved

content, value-added for subscribers, and business partnerships through optional advertisement

could help the organization retain its subscribers and maintain its leadership position in the

media/entertainment service industry.

Keywords: Netflix, Streaming Service, Strategic Analysis, SWOT, PESTEL, Blue Ocean

Strategy, Competitive Advantage

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INTRODUCTION

Purpose of Study:

The purpose of this paper is to carry out a strategic analysis of Netflix by conducting an indebt

study of the organization and using some analytical tools to analyze the internal and external

environment of the organization. This study will show the market position of Netflix, its

struggles, and how it can maintain a competitive position.

Rationale

The rationale for this study is to enable the researcher to analyze the market position of the

organization, and the factors that are impacting its position, use some analytical tools to

determine the internal and external factors affecting the organization, and, come up with a

strategic recommendation on how it can gain a competitive advantage in its operation.

Organizational Background

The organization is an American subscription streaming service and production company. It is

the most popular entertainment/media company by market capitalization, available in 195

Countries with more than 12,000 employees. It was founded in 1997 in California, USA, and

currently has about 17 subsidiaries that complement the core streaming business. The

organization has about 222 million paid subscribers worldwide.

Objectives

The objective of this paper is as follows:

• To identify the market position and the operation of the organization

• To identify the factors that are negatively impacting its market position

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 • To do a strategic analysis of the business operation by using some analytical tools to

know the strength, weaknesses, opportunities, and threats that the organization may be

facing

• To make a recommendation on how to improve on its strength and take advantage of

business opportunities in the external environment

• To determine how to maintain and sustain its competitive advantage

The Structure of this paper

This paper is divided into four parts: introduction, literature review, the body of the paper, and

conclusion.

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LITERATURE REVIEW

The literature review shall explore the literature on the following: strategy, strategic

analysis frameworks, Blue Ocean strategy, and competitive advantage

Strategy: This is when an organization creates a unique and valuable position to gain a

competitive advantage in the marketplace (Porter,1996). To gain this advantage, organizations

would carry out a strategic analysis which involves research of the firm and its working

environment and use it to formulate a strategy. Strategy is not just about being better at what one

does but being different at it. Unless an organization has a clear vision on how to be distinctively

different and unique, offering something different than their rivals to some different group of

customers, they will be eaten alive by competitors (Porter, 1999). This shows that being strategic

is the core of business development, and every organization needs to try to analyze it and know

the true position and how to make an advancement.

Strategic Analysis Frameworks: Strategic analysis frameworks are tools that help to

structure and guide businesses as they grow. These tools are used to analyze business issues and

develop the required strategies. The frameworks that will be used for this paper are SWOT (To

analyze the Strengths, Weaknesses, Opportunities, and Threats), PESTEL (to analyze the

external factors that can impact this business like Political, Economic, Social, Technological,

Environmental, and Legal factors) and Porter's Five Forces (Competitive Rivalry, Threat of

Substitute Products, Bargaining Power of Buyers, Threat of New Entrants and Bargaining Power

of Supplier). These three (3) frameworks will be used in the strategic analysis of Netflix to know

its environment, the factors facing it, and how to reposition for competitive advantage. In

addition to these three, the framework of the Blue Ocean Strategy will be recommended for the

organization.

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 Blue Ocean Strategy: The Blue Ocean strategy is defined by untapped market space,

demand creation, and the opportunity for highly profitable business growth (Kim & Mauborgne,

2005). When an organization seeks to make use of the Blue Ocean strategy, they are choosing to

pursue a market with differentiation, low cost, and value-added (Agnihotri, 2016). This allows

exploring the potential in the new market and creates new demand.

Competitive Advantage: An organization that has a competitive advantage has added

value. This is to say that a firm with a wider wedge than its rival has a competitive advantage in

its industry of operation. This added value gives it a potential for profit and growth (Ghemawat

& Rivkin, 2014). It refers to the factors that allow an organization to produce its goods and

services better or more cheaply than its competitors. These advantages could be based on low

cost, good timing, excellent use of technology, product differentiation, and being the first mover

of the product. There is a need for the organization to understand the present rules of competition

because the basis of competition changes a lot. Also, the information revolution gives a

competitive advantage (Porter, 1985)

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BODY OF THIS PAPER

THE STRATEGIC ANALYSIS OF NETFLIX, INC

In this section of the paper, the following will be discussed: about Netflix: the history and

timeline of Netflix, INC, the entertainment and media industry analysis, and the factors that

make the entertainment industry unique which are: high consumer demand, its creativity, and the

use of technology. I will then carry out the strategic business analysis and make a

recommendation on how to maintain the leading market position in its industry of operation.

About Netflix: History and Timeline

Netflix started as the first DVD-by-mail service, then included DVD subscription plans,

and is now a streaming service company. It was founded in California, the USA by Reed

Hastings, and Marc Randolph. They both launched Netflix.com in 1998 for DVD rental services

and started offering unlimited DVD rental subscription plans to their members in 1999. By the

year 2002, Netflix sold its first IPO at $1 per share under the NASDAQ ticker, NFLX, and

reached a milestone of one million accounts in 2003. In 2007, Netflix introduced its streaming

services, and this marked a turning point as it became so popular. Netflix expanded into

international markets like Canada, African countries, etc.

In 2013, Netflix began producing its original content and some of my favorites are:

'Orange is the New Black, 'Murder Mystery', ‘Bling Empire’ etc. As of June 2022, there are

about 222 million subscribers in 190 countries of the world. Despite its success in the streaming

business, Netflix has been facing challenges from new entrants and competitors like Amazon

Prime Video, Hulu, Paramount+, Disney+, and YouTube premium.

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 In the second quarter of 2022, Netflix reported a loss of 970,000 subscribers which shows

that the competitors and the new entrants are catching up with the streaming giant. Netflix’s

biggest subscriber loss of 1.3 million subscribers came from its biggest market, the US and

Canada. But they also had increased subscriptions in other markets to offset the loss (CNN,

2022).

The Analysis of the Media and Entertainment Industry in the USA

The United States has the largest market for the media and entertainment (M&E) industry

with about $717 billion and represents one-third of the global M &E industry. It includes various

segments like film, television, video games, music, and publishing. Netflix operates in the film

and television segment of the industry and these segments account for about 75% of the M&E

industry in the US. Netflix has been successful in its business of operation and this success can

be attributed to the use of technology, innovation, creativity, consumer demands, and the

business environment. These factors are discussed below:

Technology: The use of technology is significant in the successful operation of the M&E

industry. Netflix has taken full advantage of the technology available from the way it uses a

unique algorithm to suggest contents to watch, based on previous movies watched. It also used

technology to create a personal user experience for each family member by allowing them to

create their profiles and watch movies based on their preference, without interference from other

family members. This means that a family member that likes romantic comedy will not receive

suggestions to watch horror or fantasy movies. With technology, Netflix has partnered with

television manufacturers like TCL ROKU TV to include a Netflix button on remote controls for

easy access to watch Netflix.

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 Innovation: The innovative strategy and culture of Netflix are of no doubt. Netflix

illustrates a design principle of disruptive innovation that any company aspiring to succeed must

adopt. This innovation includes thinking big, starting small, failing quickly, and scaling fast

(Mui, C., 2011). CEO Hastings pursued his big idea of streaming services even though it

rendered his lofty DVD subscription business obsolete. Netflix adopted a disruptive innovation

strategy, and this led it to the market leadership position.

Creativity: This is the most significant factor that the M &E industry is dependent on.

Creativity in new and existing content is what drives the market because the industry makes use

of fresh ideas, new perspectives, and innovation. Netflix up its creative game when it started to

produce original movies and television series. Some of these original content like ‘Bridgeton’,

‘The Crown’ etc. even went as far as winning TV awards.

Consumer Demands: Netflix has been able to satisfy its consumers by creating and

adding content for the different genres of its customers. Even the kids have a place in Netflix's

customer satisfaction. Netflix can use Artificial Intelligence to know what the consumers enjoy

watching and then create contents that meet their expectation.

Business Environment: The business environment where a company operates plays a

significant role in its success. Netflix's biggest markets are in the US and Canada and, it is

important to note that these are the stable business environment where the people are enjoying

relative peace and can afford to pay for streaming subscriptions. Due to political unrest and wars

in countries like Ukraine, Netflix subscribers in these regions could care less about paying their

monthly subscriptions or even watching any movie because they are in a volatile situation.

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 SWOT ANALYSIS

The SWOT analysis monitors four factors that can impact an organization. The first two

are Strengths and Weaknesses, which monitor the internal factors while the last two are

Opportunities and Threats, which monitor the external environment of the organization.

Strength: Netflix is positioned as the most popular streaming service in the largest

market of the M & E industry in the US. This is a strong factor for Netflix. Since when it started

in 1997, Netflix has experienced consistent annual growth in market share and revenue. As of

June 2022, Netflix now has 222 million subscribers and operates in more than 190 countries.

Netflix has the internal capacity to produce and upload its content, makes use of algorithms to

recommend movies to watch, enables users to download movies and watch them later when

offline, have content for kids and families so that underage users will not be exposed to adult

content if they watch movies of their age are set up in their profiles and users can stream movies

without interruption from advertisements. All these are what I consider the internal strength of

Netflix.

Weaknesses: Netflix has continued to lose streaming rights to the content that is loved by

its consumers due to new entrants like Disney+. Streaming rights of family content like 'Jessie',

and 'Bunk'd' became expired and could not be renewed because they are Disney's. Also, the high

cost of producing its original movies and series could pose an internal weakness. A Netflix series

episode costs an average of $8 million to produce and this cost of production has negatively

impacted the rising cost of subscriptions and loss of business.

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 Opportunities: Netflix can benefit from the opportunity to create contents that are

tailored to regions. For instance, Nigerian Netflix has different content from the US platform.

Also, being able to create its content will guarantee that this content will be available for viewers

to watch for a long time, without the fear of contract expiration or missing out on favorite shows.

The good thing is that these original contents are produced up to standard and some have even

been nominated for the Emmy Awards.

Threats: The streaming service segment of the M&E industry has welcomed a good

number of new entrants, and this has posed competition for Netflix. This has caused Netflix to

lose up to 1.3 million subscribers in its largest markets of the US and Canada. Also, due to the

increase in subscription costs and current inflation going on in the world, some consumers have

resolved to share accounts with friends and extended family members to save costs. I also

canceled my Netflix subscription and decided to share it with my colleague. Because of

password sharing and business loss, Netflix has started charging an additional fee for password

sharing. This is in no doubt a threat to its operation.

PESTEL ANALYSIS

PESTEL Analysis: A PESTEL analysis is usually used to evaluate the external factors

that can impact a business operation. These external factors are categorized as Political,

Economic, Social, Technological, Environmental, and Legal factors. Netflix's growth and

success have been impacted by these factors discussed below:

Political factor: Each region and country have different political governance, rules, and

guidelines for business operations. Netflix is bound to study these guidelines and plan to observe

them when entering a new region or country. Some countries have strict rules on content that can

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be streamed so, Netflix needs to abide by the rule or be penalized. So far, Netflix has not had

major political issues, and this is good for business.

Economic factor: Due to the Covid-19 outbreak, the US is currently experiencing high

inflation and increased cost of goods and services. There is reduced spending power and

surprisingly, Netflix chose to increase the cost of subscription when people are looking for

money to buy food and gas. This economic factor must have been one of the main reasons for

their loss of subscribers.

Social factor: The social factor plays a great role in Netflix's operation, especially in

their current and new market operations. The socioeconomic status, gender, age, culture,

religion, values, ethics, and language are determining social factors that could affect consumers’

preference of movies and series to watch. Netflix currently provides content in more than 60

different languages, and this has enabled them to increase customer satisfaction. Also, Netflix

provides age-appropriate content for kids and families. I have also noticed a lot of teen movies

and series which I enjoy watching as an adult.

Technological factor: Technology is a major factor that can impact the business

operation of Netflix because its core business of streaming makes use of the internet and IT

software to bring services to the comfort of users’ homes. Netflix customers can download a

movie to watch when they are offline, can rate movies they watched, and create a personal

profile with a cool avatar of choice. Also, Netflix uses software to make recommendations or

movie suggestions, based on the movie a customer just watched. Netflix could not function

without the use of technology.

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 Environmental factor: The events going on in the environment is also a major factor

that can impact business operations. Netflix as an organization is committed to sourcing its

electric power from renewable energy (Netflix, 2015) to sustain a clean environment. Most of the

technology used is operated in the Amazon Web Services (AWS) which are powered by

renewable energy, and some are delivered from ‘Open Connect’ for efficient delivery.

Legal factor: Legal factors are dependent on the region and countries of business

operations. Netflix operates in different countries, so it must abide by the guidelines of these

countries. Netflix also has the potential of a lawsuit if customers' information like email

addresses, passwords, payment details, and phone numbers are stolen from their profiles.

PORTER’S FIVE FORCES ANALYSIS

Porter's five forces analysis was created by Michael Porter, a Harvard professor. It is

usually used to analyze the business potential for growth and profitability. The factors of

Porter's five forces are competitive rivalry, supplier power, buyer power, the threat of

substitution, and the threat of new entry. These factors will be used to analyze Netflix's

competitive behavior in the marketplace.

Competitive Rivalry: The competition is very high for Netflix because its in

competition with other industry giants like Disney+, and Amazon Prime. Disney+ has a strong

fan base that cut across all ages from 0-100+ and offers exclusive content for the family through

its monthly subscriptions. Also, Amazon Prime is a strong competitor that offers needed values

like 1–2-day shipping, free audiobooks, unlimited music, free games, free Grubhub+

membership food delivery service, and 5% money back when shopping with an Amazon credit

card as a Prime member, etc. These two companies are the major competitor of Netflix so, it is a

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big struggle to compete with the giants of the industry like them. Netflix must offer more to

consumers to remain competitive.

Supplier Power: Netflix enjoyed the supplier power while it lasts. Netflix was the first to

offer streaming services and it gained the power to attract excellent content from filmmakers but

as the new entrants like Disney+ withdrew their content to start their exclusive streaming, Netflix

started losing the supplier power.

Buyer Power: Due to the numerous streaming services available in today's market, the

power has shifted to the buyers (viewers). The viewers’ buying power is high because the

suppliers are always looking for ways to make contents that fit. The buyers also have the power

to cancel or subscribe with just a few clicks. The major deciding factor is the content and the

buyer's willingness to pay.

The threat of Substitution: Streaming services have taken over the entertainment

industry, so the threat of substitution is low. However, the recent trend is streaming through

social media like Facebook Meta, Instagram, Tik-Tok, etc. Even though they are not categorized

in the media and entertainment industry, they have started offering the services by giving the

users, the platform to entertain themselves and other users. This has gained so much popularity

among young adults.

The threat of New Entry: After Netflix dominated the streaming service industry for

years, there came new entrants like Disney+, HBO, Amazon Prime, Hulu, Paramount+, etc.,

these new ones launched an intense competition with Netflix to reduce its competitive advantage.

There is currently a twist of using social media for entertainment and this has posed a huge

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threat. In Q1 of 2022, TikTok had more than 1 billion active users and they are all making,

posting, and viewing streaming content. This has created a shift from streaming services.

RECOMMENDED SOLUTION

THE BLUE OCEAN STRATEGY

Blue Ocean Strategy: Even though Netflix is an example of the Blue Ocean Strategy

from the way it launched into the on-demand streaming of movies and TV series. However, from

the way they are losing subscribers and the pressure from competitors, the organization is

currently operating in the Red Ocean and needs urgent intervention to gain a competitive

advantage. My recommended solution will be the Blue Ocean Strategy because the organization

that seeks to create blue oceans can choose to pursue differentiation, innovation, low cost, and

value-added (Agnihotri, 2016). The Blue Ocean Strategy is the simultaneous pursuit of

differentiation and low cost to open a new market space and create new demand. Netflix needs

to capture the uncontested market space to make competition irrelevant. There is the need to

adopt the strategy perspective, get the methodology to create the market, and have a working

process to deploy the strategy for the consumers. The following are hereby recommended:

Low-cost: Netflix subscribers have seen a price increase in the subscription cost. Netflix

announced in January 2022 that its basic plan would increase from $8.99/month to $9.99/month;

the standard plan increased by $1.50 to $15.49/month while the premium went up by $2 to

$19.99/month (Forbes, 2022). This is expensive compared to other competitors and the fact that

this cost is just for mere entertainment. So many subscribers probably had a rethink and

canceled. Netflix should lower the subscription cost or give a discount for paying quarterly.

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 Differentiation: Netflix has tried to differentiate itself from other competitors by making

original movies and TV series, and creating content for specific regions and countries of

operation. This is a good strategy but more needs to be done. Netflix can start making short,

animated stories with episodes that last for less than 5 minutes each for kids, teens, and young

adults. This age demographic has helped to boost TikTok so they can still make a great impact as

Netflix subscribers. If the kids in the house love watching Netflix, parents won’t be able to

cancel their subscriptions so easily. For instance, I ask my kids which of the streaming

subscriptions to cancel at a time and I keep whichever one they are actively watching.

Value-Added: Netflix needs to offer more than just movies and shows, I recommend that

they add more value to the customers. For instance, Netflix could partner with small or large

businesses to give a monthly discount to subscribers on household essentials and consumables.

Netflix could also partner with a taxi company and subscribers could rack up points that could

use for taxi services. They need to give more to make the monthly subscription worth paying for.

I pay for Amazon Prime, not for watching the movies but also for my quick deliveries, 5% cash

back when I use an Amazon credit card as a prime subscriber, unlimited music, etc.

Optional Advertisement: Netflix is probably thinking of allowing advertisements to

boost earning potential, but it will be better if the advertisement is optional to subscribers. They

should give a further discount to those that do not mind seeing advertisements while the non-ad

streamers can continue to pay the full subscription amount. This will create a win-win situation

for the users and Netflix.

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CONCLUSION

Just like CEO Hastings has stated to the Netflix investors that the challenge and

opportunity are to accelerate revenue and membership growth by continuing to improve on

products, content, and marketing; and to better monetize the big audience (CNN, 2022). Netflix

has evolved from DVD rentals to become a streaming giant, with its own original content and

production company. However, with the competition posed by the new entrants, Netflix will

continue to lose subscribers unless the organization stays on top of its strategic game by lower

the cost through discounts, offering more value to subscribers by allowing them to enjoy other

services with points that are accrued from Netflix usage, produce shorter contents to compete

with users of TikTok, dare to be different from other competitors and make some money from an

advertisement by giving further discounts to consumers that are willing to see ads while

watching. These will further increase the competitive advantage of Netflix over other rivals.

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Reference:

Agnihotri, A., (2016). Extending boundaries of Blue Ocean Strategy. Harvard Business
Publishing

Ghemawat, P., & Rivkin, J., W., (2014). Competitive Advantage. Harvard Business Publishing

Kim, W., C., & Mauborgne, R., (2005). Blue Ocean Strategy: From Theory to Practice.
California Management Review.

Porter, M., E., (1985). How Information Gives You Competitive Advantage. Harvard Business
Review

Porter, M., E., (1996). What is Strategy? Harvard Business Publishing

Porter, M., E., (1999). Creating Advantage. Harvard Business Publishing

Pallotta, F., (2022). Netflix loses subscribers but stops the bleeding. CNN Business News.

Retrieved on August 12, 2022, from https://www.cnn.com/2022/07/19/media/netflix-

earnings/index.html

Netflix (2015). Netflix Streaming-More Energy Efficient than Breathing.

Retrieved on August 20, 2022, from

https://netflixtechblog.com/netflix/streaming/more/energy/efficient/than/breathing

Mui, C., (Mar 17, 2011). How Netflix Innovates and Wins. Business Insider News. Retrieved on

August 16, 2022, from https://www.businessinsider.com/netflix-is-the-most-essential-streaming-

service-survey-data-2021-9

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