Netflix
Netflix has grown dramatically over the past five years, reaching more than 30 million paying customers, creating numerous content quality issues in streaming segment and internal capability gap with regards to strategic transition of the company from dvd-by-mail to streaming. Organizational strategy of the company aims to enact an accelerated organic growth with a focus on global profitability of all the services (USSEC, 2014). It is evident that Netflix is one of the little companies that manage to reinvent itself at the time of crisis and under the pressures of the external environment, when it shifted from dvd-by-mail to online streaming business model (Cohan, 2013). Excited with its own success the company focused all the efforts on the organic growth, attracting new users and expanding its business. Shortly, it was clear that Netflix is not able to cope with the volume and the organization had to urgently look for the ways to innovate, improve and address the technical challenges, which outline the major strategic issues of Netflix until today. Netflix is often criticized for its inability to address the technical issues efficiently and offer responsive and flexible service to the customers, when it comes to online streaming. The issue transition is threefold. First of all, the company has to learn to maintain its bargaining position with the content providers, like Starz and Comcast. Secondly, the decision to separate DVD and streaming services into different companies, Qwikster and Netflix, had dubious response from the client. Many criticize the decision as it became less intuitive and convenient for those, who like to use both services (Armstrong and Baron, 2002). Finally, Netflix runs a risk that its customer base will outgrow the revenues, which will result in lower market. Moreover, the profits on the streaming market are significantly lower than in DVD segment due to unfavorable bargaining position with the suppliers.
An analysis of the Netflix market position allows arguing that the company has three major advantages that supersede its challenges: price, binge-watching and inbound and outbound logistics of DVD operations. First of all, it is not a secret that Netflix strategy was always based on relatively aggressive pricing strategy. Relative to one of its main competitors with similar price planning, HBO, Netflix is able to offer 30% cheaper price with is one-stop-shopping proposition for “Qwicker plus Netflix package” for only USD$ 16 and USD$ 10 for Netflix services alone. This market offer is difficult to beat, and Netflix is a leader in terms of pricing on the market. Secondly, one of the strategies of the company that deserves attention is the “episode batch release” approach, where the company gives for the judgment of its audience the entire season of such serials as The House of Cards and Orange is the New Black. Such strategy creates faster and “louder” response from the subscribers and attracts new customers, building on the recognition and visibility of Netflix brand. Finally, the company is involved in both, streaming as well as DVD rental business. Where the operational cost of maintaining bricks-and-mortals operation is significantly higher, Netflix manages to minimize its logistics costs by building affiliated relationships with suppliers. The scope and scale of operations of the company give it a strong bargaining position, which results in reduction of its safety storage, due to the suppliers’ responsiveness and product availability, higher turnover of the titles and always high quality of the DVD segment. Similar situation is seen in outbound logistics, where the volume of operations allows Netflix reach very low unit cost per DVD rental, raising its profit in this segment (Sadler, 2003; Hitt, Ireland, and Hoskisson, 2012).
An analysis reveals that the company´s two strategic issues, quality and the issues of dual brand identity can be addressed through the investment in technical infrastructure and more accurate marketing strategy, which will bring more “quality” customers, rather than their volume. When it comes to the evaluation of the quality of the Netflix service, it is important to recognize that streaming service by today accounts for over 60% of the total revenue of the company (USSEC, 2014). That said, the organization should ensure that the quality of streaming, delivered to the client does not jeopardize the competitiveness of this segment, especially in view of existing internal competition with DVD-by-mail segment. The only way to improve the situation is to allocate financial and human resources for development and construction of stronger service and technical base to support the organic growth of the company. This action is critical, given the outlined strategic goals of the company to further expand its customer base in the coming years. Investment in technology will ensure that Netflix minimizes the capability gap between its current resources and the future needs of the company. As it was identified, the company pursues questionable strategy with regards to the transition and dual branding. It is important that in its attempt to separate the brands and build on the audience, the company does not dilute its image and maintain the reputation of convenience and easy access to movies and serials, which Netflix has today (Hitt, Ireland, and Hoskisson, 2012). Accurate marketing strategy, which highlights the competitive advantages of Netflix outlined above, will allow the company increasing the price closer to HBO level and, at the same time, maintain and growing its customer base. It is evident that less aggressive price strategy will most probably result in slower growth, but it will also offer higher profit margins with less pressure on the technical infrastructure due to more selective approach to subscribers.
References
Armstrong M. and Baron A. (2002) Strategic HRM. The Key to Improved Business Performance. London: Chartered Inst. of Personnel and Development. Print.
Cohan P. (2013). How Netflix Reinvented Itself. Forbes [Online]. Retrieved 31 October 2014 from http://www.forbes.com/fdc/welcome_mjx.shtml
Hitt M.A., Ireland A.D., and Hoskisson R.E. (2012). Strategic Management: Concepts and Cases: Competitiveness and Globalization. London, UK: Cengage Learning. Print.
Sadler Ph (2003). Strategic Management. 2nd Edition. London: Kogan Page Limited
USSEC (2014). Netflix, Inc. Annual Report 2014. United States Securities and Exchange Commission. Form 10-K. Retrieved 31 October 2014 from http://ir.netflix.com/secfiling.cfm?filingID=1065280-14-6&CIK=1065280
