New entrants threaten market share and often offer cheaper substitute products. The Guardian. Netflix is a global brand and so is Prime, but the competitive advantage of Netflix is stronger. Netflix has a lot to gain by becoming a multisided platform. Apart from higher … People like to buy from sustainable businesses. The company’s operating margin grew to 13% in 2019 from 10% in 2018. Netflix has become a global brand and offers its services to around 193 million subscribers worldwide. Focus on innovation has helped the firm build a source of sustainable competitive advantage. New York. The largest markets of Netflix are the US and Canada, generating the biggest portion of its revenue. In the next three years, the overall market share of the company is expected to decrease further. The intervention and control of governments with regards to international businesses has grown a lot in recent years. Apart from that, Netflix spends on digital advertising and promotions to market its brand and individual movies and shows. The Free Press. It is evident from the reduction in the company’s market share of around 3% since 2014. Thus, the cost leader would benefit as there would be less room for differentiation. These are the largest suppliers providing their services to Netflix, and their importance grows for Netflix because of the quality of their content or technological services. The result was a subscription-based business model, with the uniq… The company’s growing technological expenses reflect its higher focus on innovation and user experience, and on the other hand, they also reflect the growing competition in the industry. How much does Netflix … While the overall level of competitive rivalry in the industry is moderate, the lead that Netflix has enjoyed over its rivals might reduce in the future. Moreover, there is also the increase of streaming services because of such companies as Disney, CBS, HBO, Amazon and others that mainly offer their own movies and shows (Heritage, 2019). If it meets fewer standards, the competitive advantage will be temporary. bennymarty - stock.adobe.comNetflix HQ in Los Gatos, California Given its current status as an established unicorn, the origins of Netflix now seem somewhat quaint. However, there are pricier premium options also for Hulu viewers. The reading rivals that serve the global markets include Prime, YouTube and Disney+. Netflix has a strong competitive advantage supported by differentiated customer experience, a large collection of Netflix originals, its focus on innovation, and a competitive pricing strategy driving higher popularity across all consumer classes. However, large businesses, whether they have an environmental impact or not, still are responsible for protecting and investing in the environment. ?Harvard Business Review, Vol. The operating margin also more than doubled in the meantime. Among streaming services, Netflix, which in 2018 became the world’s most market valued entertainment company estimated at $ 153 billion, has several competitive advantages listed by Porter. HI6006. In its first year, Disney+ plans to offer 7500+ TV shows and around 500 movies. In 2019, the company spent around $1.7 billion on research and development compared to $1.2 billion in 2018. Netflix is a highly innovative brand and invests a large sum in research and innovation which is critical to maintaining growth momentum and to provide a superior customer experience. Netflix enjoys stronger publicity and word of mouth driven by stronger brand equity. He offers an analysis framework that could help companies improve their position in the market and increase competitiveness as well as financial results in general. There are several laws addressing data privacy, and some of them are sector-specific, addressing data collection practices in various sectors of the industry. It also boasts an audience of above 2 billion. Despite being notable players, its rivals like Amazon Prime and Disney Hotstar enjoy a much smaller market share than Netflix. The company has been burning cash heavily. Abhijeet has been blogging on educational topics and business research since 2016. According to the five-force analysis of the movie rental marketplace, the competitive forces are not strong. The result is a strong and lasting source of competitive advantage for the online streaming platform. In 2019, the cost of revenues of Netflix was around $12.4 billion, or 62% of the net revenue of the company for the year. Its profitability is expected to grow faster in the future. The sales and subscriber base of the company can grow faster with lower prices or by using more competitive plans. The resources and capabilities of a company are its drivers of competitive advantage. For example, the electricity that Netflix uses is not entirely derived from renewable sources. Profits may decline, which will require managers in the industry to have theoretical knowledge, analytical skills, and good decision-making abilities. One of the key competencies that support the fast growth of the platform is its focus on technological innovation. This video presentes Porter’s 5 Forces, described in the book “Competitive Strategy”, by Prof. Michael Porter. course code. The pandemic has also brought some changes to consumer behavior, which indicates a larger number of people will depend on their smartphones and the internet for entertainment. The number of users worldwide in SVoD is expected to hit 1.34 billion by 2020. The company’s profit margins have kept expanding mainly because content production or acquisition costs are fixed. Without a vision of how the whole media ecosystem evolves, the tactical actions and … In contrast, the others are channel-specific laws governing data collection via various channels. For example, to effectively entertain the world, the movie streaming business must grow its membership to a larger global scale. There's always something new to discover and new TV shows and movies are added every week! Netflix is an entertainment company, but its business model is based mainly on digital technology. Identify and execute your own competitive strategy. Netflix is an entirely digital business and while physical businesses were hurt the most by the pandemic and lockdowns including the cinemas that remained closed worldwide, Netflix emerged as the most attractive option for people missing their dose of entertainment in the meantime. However, its business is not very diversified and also has few options for diversification. The fine can be a large part of its annual revenue. Its leading suppliers of content and services hold some strong bargaining power. Prof. Ricardo BrittoDoctor in Business Administration at USPDean of the IBS Americas. The success of Netflix's strategy lies in its ability to foster strong bonds with customers, and efficiently recruit new users. It had a huge success as the service offered affordable prices, movies and shows via streaming. The platform offers a vast set of originals, including movies and TV shows, top-rated among millennial users. Considering this policy, producers use the fifth competitive force: the bargaining power of suppliers. The global expansion of the brand has also helped it overcome the competitive pressure from the rival brands. The engagement level of each channel also decides its overall penetration of the global market. Vox. • A focus strategy, targeting a specific buyer group, product line segment or a geographic market. It can be observed that the use of typologies, such as Porter’s, reduces the wide range of combinations that a manager would have to consider. Here Porter pays more attention to internal dynamics, based on the exploration of unique content or distinct execution mode, which will enable the company to achieve a more advantageous position in the market. In fact, a number of the competitive forces mentioned by Porter manifest themselves in the increasingly fierce competition between Netflix and other streaming audiovisual media providers. Original Content. Netflix Inc. focuses on movies and series, and the production of original content. These are the four bricks of VRIO. Netflix Inc.’s generic strategy is cost leadership, which in Michael E. Porter’s model ensures competitive advantage through minimized costs and, frequently, minimized selling prices. Governments around the world are exercising tighter control over how firms operate locally in their markets. For example, its ‘The Bad Boy Billionaires’ show faced legal threat in India because of its content. Netflix offers a superior customer experience made possible through recommendation systems that make it easier for the users to select the best titles to watch from. Many of these challenges are political or legal in nature, but there are many economic, technological and social challenges also before the firms trying to grow internationally. The online streaming industry is seeing increased competition among existing players. Till now, the company has been reinvesting most of its revenue and profits in its content which has been adding to its operating expenses. Nearly all that a business owns can be classified as a resource or capability. Apart from free delivery on a large range of products sold on Amazon’s marketplace, it includes access to a large collection of videos and shows on the Prime Video Network. Until now, the company has invested most of its revenues and profits on producing original content. By threatening to raise prices – or withdraw the goods they produce – they get more money from the buyer. Netflix competitors analysis is as follows: Amazon Prime Video. This approach opens new perspectives for managers, creating additional opportunities for growth. Netflix offers a large number of movies and shows in around 30 languages targeted at audiences in different regions of the world. Apart from that, the availability of content in various local languages has also drawn subscribers from different regions in the world. Netflix’s Generic Competitive Strategy. In emerging economies like India and Brazil, it could draw more subscribers using more competitive plans. It indicates the firm’s growing profitability over the past five years. The main reason was that while the pandemic had a really strong impact on the lower end of the market, it had a relatively lower or no impact on the higher end which was evident from the sales of premium smartphones. First of all, Netflix’s sheer size as the leading online streaming provider in the world makes it one of the biggest buyers of its suppliers’ services. There is no single comprehensive law governing data privacy in the United States. Overall, Netflix is in a financially strong position. In just the past three years, the research and development expenses of the firm have close to doubled showing how technological innovation is driving continuous change at Netflix. This will only improve its competitive moat. The focus of the brand has remained on driving user engagement higher through increased focus on technological innovation. The bargaining power of buyers becomes high in cases where there are multiple substitutes available in the market. For example, all users do not access all kinds of content on the platform during a month. However, YouTube has also started offering movies for rent or purchase. Overall, Netflix customers get to choose from a vast collection of content that includes its own original content and content from other makers and shows and movies in diverse genres. Despite having achieved unprecedented market success, the company risks losing its leadership position due to the dispersed focus. This is something very relevant for democratic societies. Downloads. Its penetration of markets across Europe, Latin America, and in the Asia Pacific region has also grown stronger. Apart from the Federal laws, there are hundreds of data protection and privacy laws among the US states and territories. The global presence of the brand also offers it extra advantage over rival players trying to grow locally in the US or one of the emerging markets like Voot in India. So, the chances are thin that its debt could become a major burden in the future. Apart from its credit borrowings, the company has made contractual agreements for some of its content that it hasn’t yet paid. • A product differentiation strategy. Netflix is the current leading player in the space with Amazon as challenger. From the case it is obvious that Netflix has been growing continually year upon year. However, some smaller players from the media or tech industry have still been able to grow their presence locally in various markets or internationally using their existing capabilities but they cannot match the core competencies of Netflix and therefore do not represent a major threat to its market share. With its vast collection of movies in various languages, YouTube competes with Netflix and other online streaming services providers. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers. As a result, to maintain its lead in the online streaming industry, the company must continue to invest in original content to retain its edge. The importance of sustainability has grown with the pandemic, and now onwards, businesses will need to remain even more careful about their impact on the environment. Netflix has clearly demonstrated that it has the capability to change the industry and become a leader in the space. Overall, it has achieved a sustainable competitive advantage which will grow stronger as the company produces more localized content to engage users worldwide in various regions. The company expects to start generating positive cash flow by 2021. Its market share is at 87% as of 2019, down from 90% in 2014. Subscribe. Differentiation: This is the primary strategy Netflix adopted for faster growth worldwide. The political systems, governance and level of government control of businesses differ from market to market and region to region. In fiscal 2019, the company spent around $2.65 billion on marketing, of which around $1.88 billion were spent on advertising. Its popularity overseas has grown driven by several factors including the quality of its content, differentiated and superior viewing experience, and an improved user interface. In 2019, the research and developed expenses of the company reached $1.7 billion from $981 million in 2016. WallStreet Journal wrote about its debt in 2019, that an entertainment company’s cash obligations, and audience whims, make the profile of a content provider riskier. While a vast array of quality content is at the core of the Netflix experience, it’s the design of the platform and its other features that distinguish the experience from others. While the company’s revenue has increased in 2019 from nearly all regions, it will need to increase its penetration of the Asia Pacific and European regions to grow its revenue from these markets. It is a good idea since by creating original content, the company might save a lot on its licensing costs in the longer term. However, while the company’s net revenue has grown substantially in recent years, Netflix has also accumulated massive debt. The marketing expenses of the company have grown faster in the past three years. The analysis conducted above allows us to identify the decay of two existing dominant structures. However, legal challenges still exist and some of Netflix shows came under fire because of their content. Its focus on creating original content and providing a superior viewing experience resulted in deeper market penetration. Heritage, S. (2019). Right now, advertising forms a substantial part of its annual revenue. Like a few players in the telecom industry that offer free Netflix memberships with their plans, some of the larger buyers hold some bargaining power because of the larger size of their purchases. Netflix matches its electricity consumption (generated from non-renewable sources) with regional renewable energy certificates and carbon offsets. Its debt to equity ratio has improved since 2015. Its penetration of international markets has also grown driven by the seamless user experience the platform provides. According to sources, the company saves big on user retention by using data to understand customers’ preferences better and serve them the content they prefer. From around 4% in 2016, the company’s operating margins grew to 13% in 2019 and can rise to 16% in 2020. The threat of substitute gets minimized by several factors including the strong brand image of Netflix, its vast array of content (larger than the competing players), as well as original content and its focus on customer experience. Most of the competition comes from the largest players like Amazon Prime, YouTube, and Disney Hotstar. Apart from the high cost of revenues, which mainly includes the amortization of streaming content assets and costs associated with the acquisition, licensing, and production of content, the company also incurs heavy marketing and R&D expenses. Words. Disney has also included content from its Marvel, Star Wars, National Geographic and Pixar franchises. Stuart Heritage notes in the article  “Streaming TV is about to become very expensive – here’s why” (2019) Disney “will launch Disney +, a streaming platform that … will block a huge amount of content: Disney movies, ABC shows, Marvel and Pixar movies, Lucas movies, The Simpsons and everything else produced by 20th Century Fox”. The content was produced by Netflix itself or by big studios that were hired. With increasing competitive pressure, Netflix has to pay higher attention to user engagement and to attract new users through quality and original content. It offers its services online, and the users can watch Netflix movies and shows on any internet-enabled screen. However, there were also some industries that remained nearly unscathed despite the decline in economic activity that the pandemic caused. Another benefit of creating its own original content is that that company has more control over the quality of the content it offers. A critical component of the business strategy of Netflix is its marketing strategy and its specific marketing activities. Netflix mainly depends on the US and Canada markets for a large portion of its net revenue. Netflix is the largest online streaming site providing its services across 190 countries. COMPETITIVE POLICY 1 Table … They accounted for around 50% of its revenue in 2019. So, I believe that Netflix could adopt a three-pronged strategy to maintain its foothold in the market. It expects that subscriptions and advertising will together contribute equally to its revenue in the next three years. Still, the costs will be much lower, and the platform will have strengthened its profitability by combining higher subscriber income with lower operating expenses. Among streaming services, Netflix, which in 2018 became the world’s most market valued entertainment company estimated at $ 153 billion, has several competitive advantages listed by Porter. For example, the internet is heavily censored in China, which heavily hinders free operation of top international technology companies like Google and Facebook in the market. With time, as it continues to add more good quality and original content, the brand equity of Netflix keeps growing stronger. Bloomberg 16 January 2019. In the second quarter of 2020, it added around 10 million new members. More than its debt, its competition is a cause of worry for Netflix. Economic factors too play a direct role in the context of international business and their impact is quite deep on the profitability of international businesses. (1979). Among the concepts Porter offers, there is one that deserves special attention:  five competitive forces in a particular industry: Other key concepts of the author include choosing a strategy and stick to it: • A cost reduction strategy, in which a firm achieves dominance over its competitors and gains greater returns thanks to a policy of a reduced production and sales costs without affecting quality. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. 0. First, it strives to reduce its production and sales costs maintaining high quality. In a media communication sector, a monopoly would also bring the additional risk of losing the desirable diversity of ideas and points of view. The company’s net income rose to $1.9 billion in 2019 from $1.2 billion in 2018. One can note that in a shrinking cable TV market scenario and given the expansion of streaming movie and series providers, each of the main companies in these segments sought to follow a differentiated strategy. In the second quarter of 2020, its net number of memberships has reached 193 million and could be past 200 by the third quarter. The costs of content creation have kept growing for Netflix. Its business model is different from Netflix. Netflix has a strong competitive advantage supported by differentiated customer experience, a large collection of Netflix originals, its focus on innovation, and a competitive pricing strategy driving higher popularity across all consumer classes. The VRIO framework helps managers when they are analyzing their company’s resources and capabilities. One such deal is the multiple years licensing it has with HBO. Apart from the US & Canada, Netflix has also found impressive success in other regions, including Europe, Asia Pacific, and the Middle East. However, in the emerging economies especially, the company can find faster growth in sales and revenue by introducing more competitive plans. Google owned YouTube also poses a major threat with its large collection of movies that is available for sales or rent throughout the world. Contents : Revolutionising the US Movie Rental Business The Rising Trend of Watching Movies at Home in the US The Rising Competitive Threat: Can Netflix Sustain the Pressure? During the second quarter of 2020 only, the company added more than 10 million new subscribers as the pandemic drove people’s reliance on online sources of entertainment higher. Netflix is mainly a digital business with low to zero net environmental impact. According to Netflix, “Since 2013, DreamWorks Animation Television and Netflix have released 12 original series including DreamWorks Trollhunters, Dragons: Race to the Edge, DreamWorks Voltron Legendary Defender, All Hail King Julien, DreamWorks Spirit: Riding Free, Dinotrux and more, winning 17 Daytime Creative Arts Emmys and six Annie Awards.”. Overall, the competitive advantage it has gained by focusing on producing original content has helped it take a substantial lead over the rivals. Frustrated by Blockbuster's $40 late fee (when returning a VHS copy of Apollo 13, no less), current CEO and company co-founder Reed Hastings resolved to overhaul the then-established order of video rental. Apart from that, there are TV shows and documentaries. All of this exerts pressure on the company’s balance sheet because it comes at the cost of rising debts. Going forward, content excellence cannot be the only competitive strategy for Netflix or other players. Netflix has accumulated heavy long term debt, which can be a cause of worry for the investors. The company’s revenue also increased rapidly in recent years and has almost trebled in just five years. While Netflix has managed to navigate through all kinds of regulatory storms with success, the company will need to play cautiously at this front to avoid damaging its reputation. Still, there are other applicable laws, including labor and environment laws, that the company needs to comply with. Netflix generated $11.7 billion in 2017 in net revenues. Among cable TV companies, some continued with “fat packages” containing dozens of channels. Running head: COMPETITIVE POLICY 0 Competitive Strategy. The worth of Amazon Prime Video … You can read about the data collection practices of Netflix here. Other major challenges that make entry for new players difficult involve the legal and regulatory challenges. This gave the company enough time to blend in and create a sustainable market for its self. Netflix invests a huge sum each year in research and development. While with changing trends, the demand for certain products can rise, others can experience falling demand. The legal framework related to technology businesses and data collection related practices is still evolving in most corners of the world. Strong brand recognition already drives strong brand recall and word of mouth, and through the use of technology and data and analytics, it can retain more users. While there are more brands in the market, that are serving the entertainment needs of millennial users, Netflix has proved itself more dynamic and customer oriented in terms of understanding their expectations. 16. Apart from that, the company is also spending a huge sum each year in research and development to maintain its leadership position in the online streaming industry. It is also important that the society and the government follow industries’ structural transformations. Amazon Prime is a leading online video-on-demand service owned and operated by Amazon. Companies remain competitive through the use of well-planned strategies. At the same time, it brings challenges, especially for those companies that are having hard time adapting to new technologies. However, that does not mean that Netflix is exempt from laws or can avoid fines even after violating applicable laws. Keywords : Competitive strategy, Netflix, Niche Market, Business Model, Competition, Blockbuster, Price Wars, Amazon, DVDs by mail. However, to foster faster growth, it spends a heavy sum each year on research and development. Apart from that, its focus is also on maximizing employee satisfaction through training, performance management, and a better work life balance. Nertflix uses the data collected from users and processes it using its advanced algorithms to provide the most suitable recommendations. Netflix has invested a lot in the content on the platform. While YouTube has a vast user base, most of it spends its time watching the user generated content on the platform. Some of the leading suppliers include Dreamworks owned by Comcast, Lionsgate, and Gaumont Film Company. It had a net income of $1.9 billion, and its negative free cash flow for the year reached $3.3 billion or around $250 million higher than the previous year. Marketing is also a driver of solid competitive advantage and popularity for the online streaming brand, strengthening its presence in the global market. Overall, while the economic impact of the pandemic will remain for some time, the world economy was in very good shape before the pandemic. It is clear that following its strategy, Netflix tried to kill two birds with one stone, or even better, three birds, while focusing on differentiation, cost leadership and niche markets. Business Insider. Netflix streams its movies and shows worldwide in 190 regions. In many cases, in order to implement the chosen strategy, a firm must also develop more than one of the strategies mentioned above. Some of the largest suppliers hold most of the bargaining power. Netflix paid Warner no less than $ 100 million to continue showing “Friends” for a year, but after that the show should move to Warner Media’s streaming service which is being created (Van Der Werff, 2019). However, to drive user retention and engagement level high, the company has to focus on continuous innovation to have the best-in-class experience. So, even if the company accumulates more debt to create more original content, it has strong leverage in its subscriber base. 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