International Business & Strategy: Individual Assignment 1, Netflix Case Study
In many ways, Malaysia reflects a good balance between the eastern market structure and the western market structure (Lupo et al. 2011). It has a complex economic structure, and the disparate parts of the Malaysian economy are important to understand when gauging success in this particular market. The macro-environmental factors that should be considered when looking at the Malaysian economy can be split into important categories, reflective of a PESTLE-style analysis: the political, economic, social, technological, legal, and environmental factors are all important when considering the potential future for Netflix in the Malaysian economy (Johnson, Scholes, and Whittington 2009).
Politically, Malaysia is quite stable (Central Intelligence Agency 2016). The current ruling party in the country, the Barisan Nasional Party, has been in control of the politics of the country for more than two decades (Central Intelligence Agency 2016; Lupo et al. 2011). This political stability, in a region with high levels of corruption in the market, has made Malaysia one of the strongest economies in Southeast Asia (Central Intelligence Agency 2016). A growing economy has also led to an increase in consumerism in general within the country; however, it has also led to the expansion of the international market in cities like Kuala Lumpur (Julian and Ahmed 2009).
Socially, this varied polity in the cities has led to a potential market for Netflix as a company. Many of the people living and working in Kuala Lumpur are foreigners; these foreigners are potential consumers for media via Netflix (Lupo et al. 2011). A larger international population also means the development for a greater local demand—as people are exposed to new types of media, that media propagates and spreads throughout different groups and hierarchies.
Another benefit for choosing to utilize Malaysia as a potential future market is the technological advancement in the region. The Transparency International (2016) organization suggests that many Malaysians have access to smartphone technology; particularly in the cities. The smartphone technology has become central to the streaming services in many locations, and the high-speed data available in Malaysia for smartphone use could be an excellent opportunity for a streaming service like Netflix (Adhikari et al. 2012). Adhikari et al. (2012) suggest that Netflix requires significantly sophisticated data packaging processes to be able to interface effectively with the service (Adhikari et al., 2012).
Although there are concerns for intellectual property issues within Malaysia, the country is much more willing to comply with international standards for intellectual property than countries like China, making the Malaysian market particularly interesting when considered as a potential entry market for the rest of Asia. Netflix needs to be able to ensure that intellectual property norms are followed, and the Malaysian government is likely to comply with international standards (Transparency International 2016).
Environmentally, there is not a particular concern for Netflix; the company operates almost entirely online, and it is questionable whether the company will even need a local office. However, there are significant potential benefits for choosing Malaysia as a market. Although not a perfect market for Netflix by any means, it still presents significant short and mid-term opportunity. It seems likely that many of the individuals within the country that are computer savvy might be using Netflix via a VPN anyway; failing to expand might even harm Netflix’s profits in the long run. Although these losses might be minimal at first, continuously failing to expand would be very detrimental to the company as a whole moving forward.
Strategic Issues for Netflix in Malaysia
Opportunities
There are many important opportunities for Netflix in the Malaysian market. There is a large population of expatriates living in the cities of Malaysia, and these individuals might already have brand recognition for Netflix as a service—particularly European and American expatriates (Lupo et al. 2011). The brand has incredibly strong awareness among people of all ages in the United States in particular, and this brand awareness presents an opportunity to reach out into new markets.
The costs of licensing content in a place like Malaysia—where much of the population will prefer local media or media that is regional, the cost of licensing content will be quite low. Indeed, making this content available via the Netflix application for mobile devices will make it even more likely that the public will engage with the company (Netflix.com 2016). The company can continue to curate content and the content that it will be curating will be much more inexpensive than the current rate for Hollywood movies.
Another significant opportunity for the company is the lack of local alternatives. Netflix currently has no real analogue in Malaysia, and there is a vacuum that has been created as a result of the lack of streaming service like Netflix in the region. Netflix could easily take advantage of this vacuum through strong and effective leadership and begin to expand into the region as a whole (Ann and Carr 2010; Aasland et al. 2010; House et al. 1999). In the United States, Netflix accounts for nearly 30% of Internet traffic on a daily basis: this is, as of yet, an untapped market in Malaysia (Netflix.com 2016; Wee 2016).
Threats
Netflix, as a service, faces different threats around the world. In Asia, one of the primary concerns for businesses of all stripes is the concern for intellectual property (Lupo et al. 2011). Intellectual property disputes may be about media content and the theft of media content, but there are also concerns about the very platform being repurposed and repackaged in other places. China is notorious for intellectual property theft, and a Netflix-like service would be immensely popular in China as well (Lupo et al. 2011). While there is some threat to the company in terms of intellectual property, the real concern must be about the potential for increasing competition.
Increasing competition in places like the United States is coming from companies like Amazon Prime (Napoli 2016). Increasing competition means that a company like Netflix will struggle more to acquire the content needed to remain relevant; it also means that Netflix will be largely unable to control the prices of content. All of these factors combine to be problematic, particularly if Netflix gets a late start compared to other companies in the Malaysian economy.
The major threats to the organization are the threat of insecurity in intellectual property and the threat of increasing competition. Once these threats are addressed, there is no reason why Netflix should not be able to find immense success in the Malaysian market, particularly if the company makes an attempt to integrate as fully as possible with content that is specifically tailored to the demographic of the country as a whole. Acquiring local media should be a task that the company is able to do without amassing too much more debt.
Strengths
Perhaps the most notable strength for the organization is its popularity. The brand “Netflix” is so well known that it has become an action in popular culture: the company has become integrated into western culture so thoroughly that lacking Netflix in Malaysia must be problematic for some expatriates. Providing this service to residents is a way to simultaneously encourage one customer base and engage another. Netflix is a service that is a relatively international one—it can build and maintain a site for a country where there are no offices; the company can work truly remotely and provide the appropriate service to all countries that have a high-speed internet network structure in place.
Effective branding and the simplicity of access are the major strengths that Netflix has been able to cultivate, and these strengths will be exceptionally important in an economy like the one in Malaysia. In the United States, membership with Netflix is increasing and has yet to slow; getting these kinds of international numbers would be an immense success for the company (Bowen et al. 2014).
Convenience and cost are two other benefits for the Netflix model, and these are two things that might appeal directly to a Malaysia. Netflix always keeps cost for the subscription service relatively low, which allows people who might not otherwise be able to access the service use it (Bowen et al. 2014). Making those same services available on other devices is indicative of the convenience-based business model that has become so prominent when considering the organization. It has managed to maintain that convenience by quickly responding to any and all new technological demands on the service (Bowen et al. 2014; Napoli 2016).
Weaknesses
Although the company’s initial business model—sending DVDs through the mail to customers—has become largely extraneous for many people, it is still a relatively popular membership choice in the United States. However, this kind of DVD rental process would be almost entirely useless and very difficult in Malaysia; it would require infrastructure for storage and transport that are not currently available easily for the company as a whole (Napoli 2016).
Media companies in the emerging Netflix market in Asia might begin to see the Netflix movement into the region as an opportunity, and these companies might band together to inflate the intellectual property rights to certain important shows and pieces of media. If this were to occur, Netflix would be facing many of the same problems that are occurring in the United States (Bowen et al. 2014).
The company is heavily reliant on the current infrastructure in places like Malaysia. Although the country currently has good Internet coverage, the increased traffic to Netflix might cause technological problems for some people who are attempting to use the service. Spotty or poor service is one thing that customers would be almost completely impatient with and unwilling to tolerate (Bowen et al. 2014). Keeping costs low and service dependable are tall orders for a company like Netflix, which continues to struggle to make a significant profit in the international sector. Although the potential is high for this region, the risks associated with expansion into the region are quite significant as well (Bowen et al. 2014; Netflix.com 2016; Wee 2016).
Mode of Entry for Strategic International Expansion
International expansion has been a problem for Netflix for some time now (Napoli 2016). In fact, although revenue grew from 2010 onward, contribution loss in the international sector has been bleak. Napoli (2016) writes, “For 2013, the contribution loss from the international streaming business totaled $274 million. This line generated a contribution loss of $81 million in the first nine months of 2014, and Netflix expected a loss of $95 million for the December period” (Napoli 2016). However, Netflix has and should continue to accept that the expansion into new markets will come with an initial dip in profits.
The reason that the dip in profits should be accepted by the company as a whole is because Netflix should be trying to enter these markets as the primary service provider, before any of their major competitors can enter into the market. By accessing the market first and most aggressively, Netflix will be able to establish dominance and brand recognition among those likely to use video streaming sites. Bowen et al. (2014) write, “Efforts to continue its international expansion will probably result in contribution losses at the international operation, and constrain overall profitability in the coming years. Netflix is prioritizing long-term performance over short-run profits” (Napoli 2016). The researchers note that this has been an excellent strategy so far for Netflix, but the strategy should be continuously re-adjusted and monitored by leadership.
One of the things that Netflix should and most likely will avoid in developing markets like Malaysia is the design and implementation of the DVD rental part of the business process. Netflix’s DVD subscription subscribers are becoming fewer and fewer each year, and it does not make sense for the company to establish such a massive operation in a market so ill-prepared. The Board of the company is generally responsible for deciding the future strategic direction of the company, but it is important, particularly when expanding into new regions where new and different business strategies must be implemented (CIMA Global 2015).
Another important facet for consideration insofar as the development of a new strategy for entry is concerned is the prevalence of mobile phone usage in Asia. Mobile devices are incredibly popular, and to maintain market dominance, Netflix must continue to offer mobile-based options for users.
Just because the company has failed to make a significant profit in the international markets does not mean that the company will never be able to make any kind of profit in these markets. Indeed, it seems more and more likely that Netflix will be able to take command of the international markets through continued expansion—into places like Malaysia and Singapore—and upset any of the potential competition that might try to come into these areas. Even the online giant Amazon has had trouble usurping Netflix’s position at the top of the hierarchy. Netflix is and should be focusing on long-term profits in places like Malaysia; although the service might be slow for locals to accept, it is highly likely that the international marketplace and interaction between individuals socially will have a positive impact for the company in the mid- to long-term. Patience is the most important factor for success in the Malaysian market.
Appendix A
Analysis of Target Market
Netflix is a video streaming option that has become immensely popular in the United States and in other parts of the world. However, this streaming project has not been made available globally; as the Internet expands, companies are doing more to control the content they provide, and are more able than ever before to ensure that individuals outside their region of control do not have access to their services (Adhikari et al. 2012). Currently, Netflix’s services are available in Malaysia, South Africa, and Turkey; each of these countries offer unique challenges and opportunities to the company as a whole. However, choosing how and when to enact expansion strategies relies on a macroeconomic analysis of factors in each of these three countries.
Malaysia has the benefit of being a relatively stable nation, as its current ruling party has been in power for more than 25 years (World Economic Forum 2016). It is not without corruption, and some foreign businesses have struggled with integration into the Malaysian economy as a result. However, corruption is also relatively high in Turkey and South Africa. Transparency International, a non-profit focused on providing information regarding corruption and enforcement of intellectual property laws worldwide, states that Turkey scores a 42 out of 100 in terms of corruption in government, South Africa a 44 out of 100, and Malaysia a 50 out of 100 (Transparency International 2016). However, given that Malaysia has the highest literacy rate, life expectancy, and governmental control over the private sector, the economic opportunity in Malaysia is quite appealing for a company like Netflix.
Another thing to consider in Malaysia is the high numbers of expatriates in the country. In Kuala Lumpur, there are hundreds of thousands of foreigners from all countries living and working in the business district of the city; whether these individuals are America, European, Korean, Japanese, or Chinese, they all desire access to media from their home country. This makes Malaysia one of the most interesting potential markets for Netflix: there are different cultural trees to tap, and much of the media that potential East Asian customers desire—Korean and Chinese dramas, for instance—cost significantly less in terms of property rights to stream.
Turkey is also a country that has the potential to be an excellent market for Netflix, but the current geopolitical situation has left it a distant second to Malaysia. Turkey’s interference in the Middle East and the problems that are occurring in the region between Russia, Syria, and the Ukraine indicates that there might be significant destabilization in the region in the near future. In addition, Turkey’s repeated attempts and failures to enter the European Union indicate that the economy might weaken due to the consistent conflict in the region. South Africa’s economy and infrastructure is still developing; the high levels of corruption and violence in the society are not necessary a threat to a third-party service provider like Netflix, but the cultural opportunities for Netflix are not nearly as abundant as they are for a stable, growing nation like Malaysia.
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