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Netflix Inc.’s Business Strategy and Strategic Analysis

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Netflix Inc.’s Business Strategy and Strategic Analysis
Table of Contents
  1. SWOT and TOWS Analyses
  2. Porter’s Five Forces Analysis
  3. STEEPLE-PEST Analysis
  4. CAPM
  5. Internal Strategic Factors (IFAS)
  6. External Strategic Factors (EFAS)

Netflix is the world’s most extensive movie rental service, founded in 1997 in the U.S. During the last decade, Netflix has expanded tremendously, gaining global outreach and attracting more than 130 million subscribers from all over the world. It provides internet media content in over 190 countries. Hence, Netflix is a strong example of a successful business model. Therefore, careful consideration is essential to understand the firm’s mechanisms and steps, which led it to success, as well as prospects for its development. In particular, it is relevant to conduct a comprehensive analysis of Netflix’s internal and external environment using different analytical tools.

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SWOT and TOWS Analyses

A SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis of Netflix will form the basis of this analysis as it encompasses both the internal and external factors affecting the company. The firm’s strengths embrace exponential growth, global customer base, originality, adaptability, and competitive pricing. Within the past decade, Netflix has become a popular brand on a worldwide basis, thus demonstrating rapid exponential growth. The competitive pricing of Netflix services allows the company’s subscribers to watch unlimited content for an affordable price. Indeed, the subscription is much less expensive than going to the cinema or watching cable television. Furthermore, the firm offers a broader selection of content as compared to cable television. Another influential factor is the company’s ability to produce original content of the highest quality.

Adaptability is yet another essential strength. Netflix started in 1997 as a mailing DVD rental and sales service. However, in a year, the firm already focused on online services. In 2007, the company added streaming media content online to its services. Nowadays, Netflix offers not just TV series, but also documentaries and feature films of various genres and in different languages. As one can observe, the company has been actively expanding the scope of its services from its very foundation. Thus, Netflix is highly flexible and ready to meet the emerging demands of its customers. Meanwhile, the company’s weaknesses are growing operational costs and limited copyrights. At the same time, the company’s opportunities include expanding customer base, refreshing content library, establishing alliances, and developing niche marketing. Finally, threats for Netflix embrace competitive pressure, government regulations, and digital piracy.

The TOWS (Threats, Opportunities, Weaknesses, and Strengths) analysis allows considering the company’s business model from another perspective. In particular, it suggests specific strategies in terms of different ratios of the firm’s strengths (S), weaknesses (W), opportunities (O), and threats (T). Hence, the SO strategies for Netflix are amplifying the client base, entering new countries, strategic partnerships, and attracting new population groups. For instance, targeting China is one of the firm’s current priorities. Moreover, refreshment of the content library through concluding agreements with other movie distributors will contribute to the diversification of Netflix’s materials. Another promising direction for the company is forming strategic partnerships. Indeed, building alliances with telecom providers can facilitate the firm’s outreach in different countries. Besides, market segmentation is highly relevant as well. For example, it is essential to focus on producing region-specific content in local languages to engage the audience in specific countries.

The ST strategies embrace diversifying content and strengthening the security framework. The company is not the exclusive provider of entertainment services, and its major competitors, such as HBO, Amazon, and YouTube, are actively developing every year. Therefore, it is crucial to provide original and multidimensional content to surpass the competitors. In addition, the company faces the threat of piracy since people all over the world persistently look for new ways of downloading its content without a subscription. To resolve the problem of digital piracy, Netflix should strengthen its security system.

The WO strategies involve improving the subscription model and introducing an exemption from the price increase. Indeed, the prices for maintenance of Netflix’s content keeps growing every year, which creates a weak spot in the firm’s business model. Therefore, it is crucial to restrain the further increase in prices by providing privileges for the existing customers. Moreover, suggesting a more extensive range of resources and possibilities within a subscription model will justify its cost and render it more attractive for new clients.

The WT strategies include negotiating the legal issues as to copyrights and official restrictions. Indeed, the company controls most of its content only for a few years, and as soon as the copyrights expire, these materials migrate to other sites. Thus, the leakage of original content occurs. Therefore, Netflix needs more of its original content. Governmental regulation is another significant issue for the firm. In particular, legal restrictions in some countries, including China, make it impossible for Netflix to expand its influence. Therefore, strategic negotiations in this direction are relevant.

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Porter’s Five Forces Analysis

Next, it is essential to consider Netflix from the standpoint of Porter’s Five Forces Analysis. The internal rivalry within the industry relies on the increasing offers from such competitors as Amazon, Blockbuster, and Redbox. To meet this challenge, enhancing the company’s advertising is vital. Another effective means is establishing cooperation with such services as IMDB to promote rating and dissemination of the firm’s content. In such a manner, Netflix will be able to keep its client interested and attract new customers. The threat of substitutes is no less critical. Digital cable television can substitute Netflix’s products because it offers “on-demand” services. If telecom providers expand their resources and become competitive with Netflix’s content, many customers can switch to cable TV subscriptions. Therefore, it is vital for Netflix to continually refresh its library, master “on-demand” services, and other contemporary features to retain its success.

The threat of new entrants also requires consideration. Indeed, in the rapidly developing world of today, new services and providers can constitute a potential problem for Netflix. However, a company needs significant capital investment to enter this market and become competitive, with several well-established key players already onstage. Therefore, the appearance of a new entrant is possible, but the level of this threat is currently moderate due to the barriers mentioned above. However, careful monitoring of recent tendencies is crucial to identify the emergence of new entrants in a timely manner.

The bargaining power of Netflix’s buyers relies on the fact that its customers’ loyalty is rather weak. More specifically, the company largely depends on the cost of its subscription. Once it increases, customers tend to switch to alternative service providers. Moreover, the cancellation of the subscription is free and unrestricted, which constitutes another lever of customers’ pressure. To mitigate these risks, Netflix should implement exemption from the price increase for the existing subscribers. The bargaining power of Netflix’s suppliers relies on its licensing agreements system. Once an agreement expires, a supplier can potentially switch to Netflix’s competitors, after which the firm loses access to content. As one can observe, the mitigation of these risks is of paramount importance. In particular, Netflix can resolve this issue by expanding its scope of producing original content. In such a manner, the dependence on suppliers will be less threatening.

STEEPLE-PEST Analysis

The STEEPLE-PEST analysis is yet another feasible tool for evaluating the company’s internal and external environment. It focuses on social, technological, economic, environmental, political, legal, and ethical factors, which influence an enterprise. For Netflix, political factors result in a restriction in some countries, such as Syria, North Korea, and China. In fact, this censorship results in illegal access to content, such as through a VPN. A continually increasing subscription rate represents the major economical factor for Netflix. To face this challenge and keep its customers interested, the company needs to refine and elaborate its content. In such a manner, Netflix will justify the rise in prices, and clients will remain loyal.

Social factors for Netflix embrace an increase in the global population, cultural diversity, and population structure. It is evident that the worldwide population increase demands additional resources from Netflix. Multiculturalism is another priority of the firm. That is to say, specific strategies are relevant, depending on each particular country. To this end, Netflix develops specialized content, such as the series for Spain and India. Besides, the company must carefully study the population structure in each country and diversify its subscription plans according to different levels of income. Moreover, technological factors are also highly important. For Netflix, these factors include constant assessing and updating its programming framework, compression algorithms, and interface qualities. For instance, it is essential to develop their website and applications to enable the customers’ reviews and suggestions. In such a manner, the company will establish direct feedback with its clients and will immediately respond to their requirements and needs.

Furthermore, environmental consciousness constitutes a significant factor for the firm. For instance, Netflix does not utilize renewable energy and lacks a specific business model aimed at the promotion of environmental sustainability. At the same time, such companies as Amazon, Google, and Facebook have already launched green energy projects to sustain the environment. As one can observe, this weakness exerts a negative impact on Netflix’s brand image and offers an advantage for its competitors. Hence, it is imperative to mitigate this factor. Legal factors for Netflix include copyright legislation and consumers’ data protection issues. In fact, in some countries, the regulatory framework is not developed enough to mitigate these factors. Therefore, Netflix should evaluate this aspect carefully before entering the market in a new country. Meanwhile, ethical factors embrace the issues of integrity and morality in society, especially in terms of digital piracy, using torrents, sharing subscriptions, and so on. To face this challenge, offering more generous subscription plans can be helpful. In such a way, Netflix will be more affordable and accessible to people, thus reducing the tendencies of breaching the ethical norms.

CAPM

Another effective tool for assessing Netflix’s business model is the Capital Asset Pricing Model (CAPM), which demonstrates the return on assets. The CAPM formula is as follows: Expected return = Rf + beta [Rm – Rf], where Rf is the risk-free rate, beta is the systematic risk, and Rm is the market return. In this case, the risk-free rate is 1.19%, beta amounts to 1.47, and the market return is 11.95%. Hence, the expected return for Netflix will be 16.97% (1.19% +1.47 [11.95%–1.19%]).

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Thus, the comprehensive analysis of Netflix’s business model reflects its numerous strengths and opportunities, as well as specific weaknesses and threats for the company. Therefore, it is essential to continue expanding the firm’s sphere of influence, monitor the customers’ satisfaction with the subscription plans, and observe the recent tendencies at the market. In such a manner, Netflix will be able to sustain its progress and achieve even greater success.

Internal Strategic Factors (IFAS)

Netflix has demonstrated an outstanding exponential growth over the last decade, both in the U.S. and globally. It has been able to adapt to the changes in its environment since the first years of its operation. Furthermore, the company has significantly increased its output of original content recently, while also maintaining subscription prices that are competitive with those of other similar services. However, this expansion is driving the company’s operating costs up, and time-limited copyright agreements mean that the content provided by Netflix can leak to other services. Overall, the company has a strong internal strategy that should help it overcome the external threats that it is currently facing.

Internal Factors Weight Ratings Weighted Score Comment
Strengths
  1. Exponential growth
0.1 3.0 0.3 Sustained over years
  1. Global customer base
0.15 3.1 0.465 Expanding to new regions opens new opportunities
  1. Originality
0.15 4.0 0.6 Strong lineup of original content
  1. Adaptability
0.2 4.2 0.84 Crucial for a digital company
  1. Competitive pricing
0.1 4.3 0.43 Well-maintained
Weaknesses
  1. Growing operational costs
0.2 2.5 0.5 Proportional to growth
  1. Limited copyrights
0.1 2.0 0.2 Content leakage reduces competitive advantage
Total 1 3.335

External Strategic Factors (EFAS)

Increased competition from other online video streaming services, such as Hulu and Amazon, is creating significant threats for Netflix. Furthermore, operating in over 190 countries means that the economic and political factors of those countries significantly impact the company. Finally, digital piracy is an ever-present threat for any online data delivery platform. However, the firm’s expanding global customer base creates opportunities to provide unique and niche content for specific countries and cultures. Furthermore, the company’s increasing global influence necessitates closer interaction with local regulation agencies. Ultimately, the success of Netflix’s external strategy depends on its ability to leverage the adaptability that the company has already demonstrated to work with the diversity of demand and regulations of the countries in which it operates.

External Factors Weight Ratings Weighted Score Comment
Opportunities
  1. Expanding customer base
0.1 3.0 0.3 Proportional to growth
  1. Refreshing content library
0.15 3.5 0.525 Required to retain subscribers
  1. Establishing alliances
0.1 2.7 0.27 Attracting new studios to create original content
  1. Developing niche marketing
0.2 4.1 0.82 Region-specific content can attract new subscribers
Threats
  1. Competitive pressure
0.2 3.2 0.64 Major competitors are actively developing every year
  1. Government regulations
0.1 2.4 0.24 Local regulations limit content availability by country
  1. Digital piracy
0.15 1.7 0.255 Potential users can obtain content without a subscription
Total 1.0 3.05

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